How and why to use derivatives: IMCA conference

There are eight main reasons to use derivatives, says John Hull, a professor of Derivatives and Risk Management at the Rotman School of Management, University of Toronto. These are:

• to change beta without trading the underlying;
• to capitalize on stock picking without taking as much market risk;
• to gain exposure to commodities prices;
• to change the duration of a bond portfolio;
• to manage FX exposure;
• to manage inflation and longevity risk;
• to reflect your view on the market and whether a big move is coming; and
• to protect against a specific risk (Read: Using short positions to boost liquidity).

But consider that derivatives are becoming more expensive and that there are risks involved in adding them to portfolios, says Hull. When using derivatives with a client, he suggests you need to not only educate him but also discuss that client’s expectations in-depth.

Read:

• Why fund managers use derivatives
• OSC publishes amendments to OTC derivatives trade reporting rules

Hull spoke this afternoon at the Investment Management Consultants Association’s conference in Toronto.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.