Which of the following is the basic premise of a derivative?
A) limiting the value of an asset attached to them
B) transferring risk from one party to another
C) linking shares to governmental bonds
D) minimizing the risk for all parties involved
E) maximizing the dividend payout on equities
Answer: B
Explanation: The basic premise of a derivative is transferring risk from a party that wants to decrease its risk exposure to a party that is willing to increase its risk exposure in exchange for the opportunity to pursue higher profits.
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