Which characteristic of derivatives allows investors to control a large position with a smaller amount of capital?
Understand the Problem
The question is asking about the characteristic of derivatives that enables investors to manage substantial positions using less capital. To answer this, we will analyze the options provided, focusing on which one correctly relates to the concept of controlling larger investments with minimal capital outlay.
Answer
Leverage
The characteristic of derivatives that allows investors to control a large position with a smaller amount of capital is leverage.
Answer for screen readers
The characteristic of derivatives that allows investors to control a large position with a smaller amount of capital is leverage.
More Information
Leverage is a key feature of financial derivatives. It allows investors to amplify both potential gains and losses since a relatively small investment can control a much larger financial position.
Tips
A common mistake is confusing leverage with hedging. Hedging is used to reduce risk, whereas leverage involves using borrowed capital or financial derivatives to increase investment potential.
Sources
- Derivatives: Types, Considerations, and Pros and Cons - Investopedia - investopedia.com
- What is a Derivative - Types, Meaning, Examples, Advantages - icicidirect.com
- Derivatives explained: everything you need to know - Skilling.com - skilling.com
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