Lesson 1 of 6 · 12 min
Benefit 1: transferring risk and creating new exposures
Derivatives let you allocate, transfer or reshape exposure to a price today, without trading the underlying itself, which closes the timing gap between an economic decision and the moment you can act in the cash market.
In short
- Issuers and investors often make an economic decision before they can trade in the cash market. A derivative agreed today at a fixed price bridges that timing gap.
- Derivatives move price risk across time and to the participants who are willing and able to carry it.
- Issuer examples: buying inputs before sales are known, paying for imports in a foreign currency later, fixing the cost of debt before refinancing.
- Investor examples: acting on a view without cash on hand, and deciding today how to reinvest a future coupon, dividend or principal repayment.
- Derivatives can also build payoff profiles that do not exist in the cash market, such as a covered call.
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