CFA Practice Question

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CFA Practice Question

Derivatives can be used either to hedge or to speculate. These actions ______.

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.
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