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Derivatives give you finer control over the financial risks to which you’re exposed. So for instance, if you’re McDonald’s and you’re planning on introducing the Chicken McNugget, you’re exposed to chicken price risk: the price of a McNugget meal is sticky, so if chicken prices go up a lot you could lose a lot of money. One thing you can do is buy chicken futures to lock in the price; if chicken futures aren’t available you can approximate them with grain and soy futures, since the price risk of a chicken is mostly the price risk of its feed. Another example is if you’re a US-based company but do a lot of business in the Eurozone; you’re exposed to currency risk that you can hedge away with a swap.

It’s true that if you’re a small individual investor you don’t have much use for derivatives; you probably don’t have idiosyncratic risks in your portfolio you need to hedge away. But businesses and big institutional investors do.




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