User:ISHIKAWAYI/Derivative (finance)

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Risks of derivative markets

Article body
Basis risk Divergence between the expected value of a derivative versus underlying transaction Liquidity risk Divergence between the cash flow timing of a derivative versus underlying transaction Counterparty credit risk Derivatives often give rise to counterparty credit exposure resulting from differences in the current price versus expected future settlement price Greater speculative use High degree of implicit leverage may increase the likelihood of financial distress Lack of transparency Derivatives add portfolio complexity and may create an exposure profile that is not well understood by stakeholders Destabilization and systemic risk Use of leverage may lead to broad financial distress and bankruptcy