Derivatives Use by Investors

As we have seen, investors can hedge, modify, or increase their exposure to the risk of an underlying asset or interest rate with derivatives positions, either forward commitments or contingent claims. Some examples are:

• An investor can buy silver forwards to gain exposure to the price of silver, with no or low funds initially required.
• An investor can increase the duration of their bond portfolio by entering an interest rate swap as the floating-rate payer/fixed-rate receiver, which is similar to issuing floating-rate debt and buying a fixed-rate bond with the proceeds.
• An equity portfolio manager can modify their market risk exposure temporarily at low cost, increasing it by buying equity index futures or decreasing it by selling equity index futures. Alternatively, the portfolio manager could decrease downside risk and preserve upside potential by buying puts on an equity index.