Managing Equity Portfolio Risk with Derivatives

As a portfolio manager, you are tasked with designing a risk management strategy for a client who is primarily invested in equities. The client is concerned about potential downside risks due to market volatility as well as a possible downturn in the economy.

Discuss how derivative instruments, such as options and futures, can be utilized to manage the client's equity portfolio risk. In your response, provide specific examples of how these derivatives work, their benefits, and any potential drawbacks associated with their use.