I have two problems with this question.:
For Q 4:
- For consideration 2- spread widening is not a tail risk- right? Tail risk is the black swan event.
- Quote from the text- ‘Derivatives are often the most inexpensive and capital-efficient tail risk hedges in the credit market, and those investors who cannot use derivatives may be unable to hedge certain tail risks.’
These both sentences are contradictory- can anyone clarify?
Is this from a topic test? I don’t have the case information, so my answers will be somewhat generic.
It can certainly be a tail risk. It will lead to lower returns, and if it’s sufficiently large, and more likely than models predict, then it would be a tail risk.
I’m not sure that I understand your question. Are you saying that you think that your sentence #2 contradicts your sentence #1? If so, I’m not sure why you think that; it doesn’t.
Sorry for being vague.
Thanks magician for your response. For 2nd one, I was talking about the sentence in quotation marks.
It’s not contradictory. Derivatives are cheap and effective, but some investors aren’t allowed to use them.