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Answer: A primary risk management practice is the definition and vigilant, daily monitoring of risk limits
**Correct answer: B** Hull emphasizes that effective risk management depends on clearly defined risk limits and the **continuous, daily monitoring** of those limits. Why the other choices are incorrect: - **A** is too strong and is not Hull's view. Speculators can play a useful role by providing liquidity and taking the other side of hedging demand. - **C** is incorrect because many well-known derivatives disasters were caused by **single individuals** or concentrated trading authority, such as rogue traders. - **D** is incorrect because derivatives can be appropriate for **both financial and non-financial firms** when used to manage risk properly.
Author: Manit Arora
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Question 140.1 John Hull is most likely to agree with which of the following statements about the risks of derivatives?
A
Hedgers and arbitrageurs have a productive role in markets, but speculators intensify systematic risk and do not have a productive role
B
A primary risk management practice is the definition and vigilant, daily monitoring of risk limits
C
Few of the spectacular derivatives mishaps arose from the activities of a single employee; most arose from large groups
D
Derivatives are inappropriate for non-financial companies and should generally be used only by financial firms
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