Economics Derivatives Questions
The role of derivatives in investment portfolios is to provide investors with various risk management tools and opportunities for hedging, speculation, and arbitrage. Derivatives allow investors to mitigate potential losses by hedging against adverse price movements in underlying assets. They also offer opportunities for speculation, allowing investors to profit from anticipated price movements without owning the underlying assets. Additionally, derivatives enable investors to engage in arbitrage, taking advantage of price discrepancies between different markets or instruments. Overall, derivatives play a crucial role in enhancing portfolio diversification, managing risk, and potentially increasing returns for investors.