Which of the following describes a typical function of derivatives?

The function of derivatives primarily includes acting as a safeguard against price volatility. Derivatives, such as options, futures, and swaps, are financial contracts that derive their value from underlying assets or indices. These instruments are widely used for hedging purposes, allowing investors and companies to protect themselves against adverse price movements in the underlying assets. By using derivatives, market participants can lock in prices, manage risks associated with fluctuations in interest rates, currency values, and commodity prices, thereby achieving greater stability in their financial operations.

For example, a farmer might use futures contracts to lock in the price of their crops before harvest, thus mitigating the risk of price declines. Similarly, an investor might employ options to protect their equity investments from downside risk. This aspect of derivatives is fundamental to their purpose in risk management, making the answer accurate in describing a typical function of these financial instruments.