Chartered Investment Manager (CIM) Practice Exam · Question
A portfolio manager uses derivatives to reduce the overall risk exposure of a portfolio without significantly altering its underlying asset holdings. This application of derivatives is best described as:
Hedging involves using derivatives to mitigate or offset potential losses from adverse price movements in an underlying asset or portfolio component.
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Question: A portfolio manager uses derivatives to reduce the overall risk exposure of a portfolio without significantly altering its underlying asset holdings. This application of derivatives is best described as:
Answer options:
- Speculation.
- Arbitrage. ✅ Hedging.
- Leverage.
Correct answer: Hedging.
Explanation: Hedging involves using derivatives to mitigate or offset potential losses from adverse price movements in an underlying asset or portfolio component.
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