The type of risk that is best addressed with the purchase of options and/or futures contracts is market risk. Options and futures contracts allow investors to protect themselves from adverse fluctuations in the market.
The type of risk that is best addressed with the purchase of options and/or futures contracts is market risk. Market risk refers to the potential for losses due to changes in overall market conditions. By purchasing options and/or futures contracts, investors can protect themselves from adverse fluctuations in the market.
Options and futures contracts are financial derivatives that allow investors to hedge against market risk. A call option gives the holder the right, but not the obligation, to buy an asset at a specified price within a certain timeframe. A put option gives the holder the right, but not the obligation, to sell an asset at a specified price within a certain timeframe. Futures contracts, on the other hand, are agreements to buy or sell an asset at a predetermined price on a future date.
For example, let's say an investor holds a portfolio of stocks and is concerned about the possibility of a market downturn. They could purchase put options on the stock market index, which would allow them to sell their portfolio at a specified price if the market declines. This would help protect the investor from potential losses in the event of a market crash.