Understanding Options in Risk Management

Very Easy Risk Management Derivatives In Risk Management

John is a portfolio manager for a large pension fund. He is concerned about potential losses in his equity portfolio due to market volatility. To mitigate this risk, he is considering using derivatives. Specifically, he is exploring options as a strategy to protect the value of his investments. Which of the following statements correctly describes how options can be used in risk management?

Options can be used to hedge against losses by granting the holder the right, but not the obligation, to sell an asset at a predetermined price.

Options inherently guarantee a profit regardless of market movements, allowing investors to eliminate risk completely.

Options must be exercised in order to hedge any potential risk associated with market volatility.

Hint

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