- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 3. Derivative Benefits, Risks, and Issuer and Investor Uses
- Subject 2. Issuer and Investor Use of Derivatives
CFA Practice Question
Derivatives can be used either to hedge or to speculate. These actions ______.
B. decrease risk in both cases
C. spread or minimize risk in both cases
D. offset risk by hedging and increase risk by speculating
A. increase risk in both cases
B. decrease risk in both cases
C. spread or minimize risk in both cases
D. offset risk by hedging and increase risk by speculating
Correct Answer: D
User Contributed Comments 6
| User | Comment |
|---|---|
| jainrajeshv | Offset the risk means what? |
| johnowens | offset risk: to have risk which opposes already held risk. If it is known that when the price of A goes up, the price of B goes down. Then if you buy A and buy B, no matter which one goes down, you offset that downside risk by making money on the other. abra ka dabra |
| johntan1979 | Avada Kedavra |
| To-be-CFA | Mr. Bombastic.. I am fantastic! |
| ankurwa10 | @johnownes well put. |
| khalifa92 | hedge: transfer risk to another party. speculate: invest and gain with existent of risk. they are the counter-party of each other. |