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Questions and Answers
What is a potential consequence of the high degree of implicit leverage in some derivative strategies?
What is a potential consequence of the high degree of implicit leverage in some derivative strategies?
Why do derivatives add complexity to a portfolio?
Why do derivatives add complexity to a portfolio?
What is the term for the potential divergence between the expected value of a derivative instrument and an underlying or hedged transaction?
What is the term for the potential divergence between the expected value of a derivative instrument and an underlying or hedged transaction?
Which of the following is a characteristic of derivatives that can make them difficult to manage?
Which of the following is a characteristic of derivatives that can make them difficult to manage?
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What is a potential consequence of a lack of transparency in derivatives management?
What is a potential consequence of a lack of transparency in derivatives management?
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Study Notes
Risks Associated with Derivatives
- High degree of implicit leverage in some derivative strategies can increase the likelihood of financial distress, making it a significant risk.
- Derivatives can add complexity to a portfolio, making it challenging for stakeholders to understand the exposure profile, leading to a lack of transparency.
- Basis risk arises from the potential divergence between the expected value of a derivative instrument and the underlying or hedged transaction, which can result in unforeseen losses.
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Description
This quiz covers the various risks associated with derivatives, including implicit leverage, lack of transparency, and basis risk. It's essential for finance professionals to understand these risks to make informed investment decisions.
