Define the Concept of a "Tail Risk" in the Context of Financial Derivatives ▴ Learn

Define the Concept of a “Tail Risk” in the Context of Financial Derivatives.

Tail risk refers to the risk of an extremely unlikely but potentially catastrophic event occurring, causing a massive loss. In options, this corresponds to the underlying asset experiencing a sudden, huge move (a "fat tail" event) that pushes an out-of-the-money option deep into the money.

Derivatives traders often use options to hedge or speculate on these low-probability, high-impact events.

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