Weigh derivatives against physical (cash market) trades as ways to set or change asset class and risk exposures, in terms of costs and benefits

Futures, forwards, swaps and options can change exposure quickly and cheaply without disturbing the underlying holdings, which matters when assets are illiquid, run by external managers or would trigger taxes if sold. They need little capital upfront. Their drawbacks are roll costs and basis risk when the derivative does not track the exposure precisely, margin and collateral calls that create liquidity needs, counterparty risk on OTC contracts, and hidden leverage. Cash market trades are simple and permanent, suit lasting strategic changes and avoid roll and basis problems, but incur bid–ask spreads, market impact and taxes, and take time for illiquid assets. The trap is ignoring collateral: an overlay can force sales of other assets in a crisis.