What is a characteristic of derivatives that provides protection against loss?
Understand the Problem
The question is asking about a specific characteristic of derivatives that helps to mitigate or provide protection against financial loss. It is seeking to identify the correct answer from the provided options.
Answer
Protection against loss is achieved through hedging.
The characteristic of derivatives that provides protection against loss is their ability to hedge a position against adverse price movements.
Answer for screen readers
The characteristic of derivatives that provides protection against loss is their ability to hedge a position against adverse price movements.
More Information
Derivatives, such as options and futures, are commonly used to hedge risks in financial markets. Hedging allows investors to protect themselves against potential losses due to unfavorable price changes.
Tips
A common mistake is not understanding that while derivatives can offer protection, they also carry their own risks if not used properly.
Sources
- Overview of Derivatives - National Institute of Securities Markets - nism.ac.in
- Derivatives 101: A Beginner's Guide - Investopedia - investopedia.com
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