How Do Exchanges Use Financial Derivatives to Hedge against the Risks of Cryptocurrency Theft or Fraud?

Exchanges can use financial derivatives to hedge against specific risks, although it is complex. For instance, an exchange could purchase put options on a cryptocurrency it holds in large quantities.

If a major theft caused the market price to crash, the gains from the put options would offset some of the losses from the stolen assets. More directly, specialized insurance companies are now offering policies against crypto theft, which are themselves a form of derivative, transferring risk for a premium.

Exchanges might also use futures to manage price exposure of their corporate treasury.