Derivative markets exist in order to:
A) allow for the direct cash sale of common shares.
B) allow for the direct cash sale of corporate bonds.
C) reduce the risk of exposure to price fluctuations in cash markets.
D) overcome some of the information problems involved in trades in over-the-counter markets.

Question

Quizplus · Accepted Answer

Derivative markets allow for the use of financial instruments such as futures, options, and swaps to hedge against potential price fluctuations in cash markets, thereby reducing risk exposure. The direct cash sale of common shares (A) or corporate bonds (B) is not the primary function of derivative markets. While some types of derivatives, such as standard futures contracts, are traded on organized exchanges with standardized terms and publicly available pricing, other derivatives are traded in over-the-counter markets, where information problems and counterparty risk remain. However, derivatives can also be used to overcome some of these challenges (D) by providing an avenue for customized and bilateral transactions.

Derivative Markets Exist in Order To