4.4. Benefits and Risks of Derivatives

One of the primary benefits of derivatives for conservative investors is that they can be used to hedge an investment’s performance or hedge against broad economic downturns. By guaranteeing an investor’s right to buy or sell a security or commodity at a price in the future, an investor can limit the effects of a possible swing in one security or even the broad market.

For example, an investor who has made a quick profit on a couple of mutual funds may want to protect her profits until she’s held the positions for a full year and can sell them (ensuring a lower tax rate). By buying a put option on one of the br