Past exam of the short options paper shared by Prelims and Parts A and B of the physics course of the University of Oxford / 2012 / S9 / 2 / 3

Derivatives can transfer risk, improve price discovery and permit hedging, so their existence is not by itself evidence that they cause crashes. They can also amplify stress through leverage, margin calls, counterparty exposure and forced dynamic hedging into falling markets. A short-gamma hedge can require selling more underlying after a fall, reinforcing feedback when liquidity is thin. The causal issue is the combination of positions, funding, market depth and institutional rules; derivatives are neither necessary nor sufficient for a crash, and correlation between trading volume and a crash does not establish the direction of causation.