Derivative Reports

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International Research Journal of Finance and Economics
ISSN 1450-2887 Issue 37 (2010)
© EuroJournals Publishing, Inc. 2010
http://www.eurojournals.com/finance.htm
Development of Financial Derivatives Market in India- A Case Study
Ashutosh Vashishtha
Faculty College of Management, Shri Mata Vaishno Devi University (SMVDU) Katra. (J&K) India
E-mail: ashutosh.vashistha@gmail.com
Tel: +91-941-9216301
Satish Kumar
Research Fellow, Department of Management Studies
Indian Institute of Technology Roorkee, India
E-mail: satisddm@iitr.ernet.in
Tel: +91-925-8010496
Abstract
Risk is a characteristic feature of most commodity and capital markets. Variations in the prices of agricultural and non-agricultural commodities are induced, over time, by demand-supply dynamics. The last two decades have witnessed many-fold increase in the volume of international trade and business due to the wave of globalization and liberalization sweeping across the world. This has led to rapid and unpredictable variations in financial assets prices, interest rates and exchange rates, and subsequently, to exposing the corporate world to an unwieldy financial risk. In the present highly uncertain business scenario, the importance of risk management is much greater than ever before. The emergence of derivatives market is an ingenious feat of financial engineering that provides an effective and less costly solution to the problem of risk that is embedded in the price unpredictability of the underlying asset. In India, the emergence and growth of derivatives market is relatively a recent phenomenon. Since its inception in June 2000, derivatives market has exhibited exponential growth both in terms of volume and number of traded contracts. The market turn-over has grown from Rs.2365 crore in 2000-2001 to Rs. 11010482.20 crore in 2008-2009. Within a short span of eight years, derivatives trading in India has surpassed cash segment in terms of turnover and number of traded contracts. The present study encompasses in its scope an analysis of historical roots of derivative trading, types of derivative products, regulation and policy developments, trend and growth, future prospects and challenges of derivative market in India. Some space is devoted also to a brief discussion of the status of global derivatives markets vis-a–vis the Indian derivatives market.

Keywords: Forward, Futures, Options, Financial Derivatives, Risk Management, Exchange rates
JEL Classification Codes: G1, G2
International Research Journal of Finance and Economics - Issue 37 (2010) 16 Introduction
Risk1 is a characteristic feature of all commodity and capital markets. Over time, variations in the prices of agricultural and non-agricultural commodities occur as a result of interaction of demand and supply forces. The last two decades have witnessed a many-fold increase in the volume of international trade and business due to the ever growing wave of globalization and liberalization sweeping across the world. As a result, financial markets have experienced rapid variations in interest and exchange rates, stock market prices thus exposing the corporate world to a state of growing financial risk. Increased financial risk causes losses to an otherwise profitable organisation. This underlines the importance of risk management to hedge against uncertainty. Derivatives provide an effective solution to the problem of risk caused by uncertainty and volatility in underlying asset. Derivatives are risk management tools that help an organisation to effectively transfer risk. Derivatives are instruments which have no independent value. Their value depends upon the underlying asset. The underlying asset may be financial or non-financial.

The present study attempts to discuss the genesis of derivatives trading by tracing its historical development, types of traded derivatives products, regulation and policy developments, trend and growth, future prospects and challenges of derivative market in...
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