Correct answer: B

Hull discusses several common ways derivatives can be misused, including:

• Over-diversification, which can dilute oversight and make risk harder to monitor.
• Pricing illiquid or exotic instruments off actively traded instruments, which can create large valuation errors when the instruments are not truly comparable.
• Too much trust in models, which can lead firms to underestimate tail risk, model risk, and parameter uncertainty.

By contrast, financing long-term assets with short-term liabilities is a funding and liquidity mismatch, but it is not one of Hull's direct examples of how derivatives themselves are easily misused.