Common Myths About Derivatives – Reality Check

People fear what they don't understand. Let's bust some myths.

1. Myth vs Reality

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3. Myth: Derivatives are High Risk

• Reality: They are Leveraged, which magnifies risk. But if used for hedging (without leverage), they reduce risk.

2. Exam Notes: Writing the Answer

Question: "Discuss the common myths associated with financial derivatives." (5 Marks)

Answering Strategy:

1. Format: Use a Table (Myth | Reality).
2. Key Point: Focus on the "Gambling" myth. Explain that gambling creates a risk (Dice roll) where none existed. Derivatives deal with existing business risks (Price fall).

Summary

• Neutral: The instrument is neutral. The user defines the risk.
• Zero Sum Game: For every winner, there is a loser. Wealth is transferred, not created (unlike Equity).

Quiz Time! 🎯

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