Utilizing Derivatives for Market Risk Mitigation

XYZ Capital Management is a firm focused on capital preservation for high-net-worth clients. Recently, the firm noticed significant volatility in the equities market and is considering using derivatives to mitigate this risk. The portfolio manager has approached you for advice on how to effectively apply derivatives to manage market risk.

You are required to discuss how the firm can implement a risk management strategy utilizing derivatives. Specifically, outline the types of derivatives that could be employed, their potential benefits, and the drawbacks associated with their use. Additionally, describe how these derivatives can be integrated within a broader risk management framework.

Your response should demonstrate a comprehensive understanding of the use of derivatives in risk management and should address both the theoretical aspects and practical considerations relevant to the specific client context.