Explain whether the following statements are true or false.

a. Derivative transactions are designed to increase risk and are used almost exclusively by speculators who are looking to capture high returns.
b. Hedge funds typically have large minimum investments and are marketed to institutions and individuals with high net worths.
c. Hedge funds have traditionally highly regulated.
d. The New York Stock Exchange is an example of a stock exchange that has a physical location.
e. A larger bid-ask spread means that the dealer will realize a lower profit.

a. Derivatives are usually designed to hedge risks. Instruments like Credit Default Swaps, Forward, Options and Futures are designed to reduce the risk of any investor. However, these instruments might sometime poses a risk of their own, as they are mostly traded on speculation basis only, not on the Net Asset Value (NAV) of the underlying assets. Dealing with derivatives purely based on speculative basis, instead of understanding the underlying risks of the asset is more counter productive to the actual purpose of derivatives. This was more evident during the 2007 crisis, as speculative trading on credit default swaps and other derivatives lead to the global financial meltdown.

b. Hedge funds are high risk, high return funds that are marketed to institutions and large fund investors. These funds are designed to take high risk and make high returns for the investors. These are usually highly levered funds, which means they have very high debt to equity ratios.

c. Hedge funds are actually one of the lowest regulated funds, this means that they can take un-regulated risks and make enormous profits. They face no limitation by FED or SEC on amount of debt they can take or on the minimal capital requirement to operate that fund. So in case of gain on the fund, the return on equity (ROE) is multiplied many times as a result of high Debt to Equity Ratio, but on the downside the loss is also multiplied thus inuring a huge loss to the investors.

d. Yes, NYSE is a physical location stock exchange that historically has conducted stock trading on the trade floor. In contrast, NASDAQ is an electronic stock exchange.