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Multi-Asset Investing: A practical guide to modern portfolio management by Yoram Lustig

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25. Derivatives

Derivatives are financial instruments whose performance is based or derived from the performance or behaviour of the price of underlying assets (underlying). The holders of derivatives do not need to hold the underlying. Most financial derivative transactions are cash settled instead of delivering the underlying from the seller to the buyer. Some derivatives, such as options, require a premium payment. Derivatives are often used to manage (hedge) or assume (speculate) risk. The underlying can be interest rates, equity or bond prices, currency rates, commodity prices, credit risk and so on.

Warren Buffett said “I view derivatives as time bombs, both for the parties that deal in them and the economic system… In my view, derivatives ...

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