Utilizing Derivatives for Risk Management in Wealth Allocation

Imagine a high-net-worth client who recently received a large inheritance and wants to allocate their wealth strategically to meet both current lifestyle needs and long-term goals. The client is particularly concerned about the volatility of financial markets and the potential impact of inflation on their portfolio. They have a balanced portfolio consisting of 60% equities, 30% fixed income, and 10% alternatives, with a strong emphasis on capital preservation.

To help address the client's concerns, you are tasked with utilizing derivatives as a risk management tool. Examine how you could use options and futures in your strategy. Discuss the specific derivatives you would recommend, their intended purpose, and how they would align with the client’s risk tolerance and investment objectives. Include considerations for both hedging and speculative opportunities, as well as potential risks involved in using these derivatives.

Finally, provide a detailed assessment of how these derivatives would enhance the client’s overall asset allocation strategy and contribute to achieving their objectives.