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Answer: Excessive risk-taking and leverage in derivative markets can lead to market instability.
**Explanation:** - **Option A** is incorrect because derivatives, such as futures, often enhance price discovery by providing insights into future cash market trends. They do not reduce the efficiency of price discovery for the underlying asset. - **Option B** is incorrect because derivatives typically offer lower transaction costs compared to the underlying asset. They also require less capital and facilitate easier short selling. - **Option C** is correct. Excessive risk-taking and leverage in derivative markets, as seen during the 2008 financial crisis, can contribute to market stress. Derivatives introduce both benefits and risks, and their misuse can destabilize markets.
Author: LeetQuiz Editorial Team
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Which of the following statements regarding derivatives is most accurate?
A
Derivatives diminish the efficiency of price discovery for the underlying asset.
B
The transaction costs associated with derivatives exceed those of the underlying asset.
C
Excessive risk-taking and leverage in derivative markets can lead to market instability.
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