In risk management, financial derivatives are primarily used for which purpose?

Financial derivatives are primarily utilized in risk management for hedging and speculating. Hedging involves using derivatives to offset potential losses in investments by taking an opposing position in a related security or asset. This serves to reduce risk exposure, allowing companies and investors to stabilize cash flows and protect against adverse price movements.

Speculating, on the other hand, involves taking positions in derivatives to profit from anticipated market movements. Speculators aim to leverage their positions, thus potentially amplifying their returns (alongside their risks) due to the inherent leverage that comes with derivatives.

While building physical assets, completing regulatory reports, and providing loans may be essential functions in finance and risk management, they do not directly leverage the unique characteristics of derivatives. Financial derivatives are not involved in constructing tangible resources or in the regulatory framework in the same manner they apply to hedging risk or engaging in speculative trading. Therefore, the correct choice encapsulates the core functionality of derivatives in the context of financial risk management.