Description
With globalization of the financial sector, it's time to recast the architecture of the financial market. The liberalized policy being followed by the Government of India and the gradual withdrawal of the procurement and distribution channel necessitated setting in place a market mechanism to perform the economic functions of price discovery and risk management.
Emergence of Derivative Market in India
With globalization of the financial sector, it's time to
recast the architecture of the financial market. The
liberalized policy being followed by the Government of
India and the gradual withdrawal of the procurement
and distribution channel necessitated setting in place
a market mechanism to perform the economic
functions of price discovery and risk management. Till
the mid – 1980's, the Indian financial system did not
see much innovation. In the last 18 years, financial
innovation in India has picked up and it is expected to
grow in the years to come, as a more liberalized
environment affords greater scope for financial
innovation at the same time financial markets are, by
nature, extremely volatile and hence the risk factor is
an important concern for financial agents. To reduce
this risk, the concept of derivatives comes into the
picture. Derivatives are products whose values are
derived from one or more basic variables called bases.
India is traditionally an agriculture country with
strong government intervention. Government
arbitrates to maintain buffer stocks, fix prices, impose
import-export restrictions, etc. This paper focuses on
the basic understanding about derivatives market and
its development in India.
The emergence of the market for derivatives products,
most notable forwards, futures, options and swaps can
be traced back to the willingness of risk-averse
economic agents to guard themselves against
uncertainties arising out of fluctuations in asset prices.
By their very nature, the financial markets can be
subject to a very high degree of volatility. Through the
use of derivative products, it is possible to partially or
fully transfer price risks by locking-in asset prices. As
instruments of risk management, derivatives products
generally do not influence the fluctuations in the
underlying asset prices. However, by locking-in asset
prices, derivatives products minimize the impact of
fluctuations in asset prices on the profitability and
cash flow situation of risk-averse investors.
doc_735865017.docx
With globalization of the financial sector, it's time to recast the architecture of the financial market. The liberalized policy being followed by the Government of India and the gradual withdrawal of the procurement and distribution channel necessitated setting in place a market mechanism to perform the economic functions of price discovery and risk management.
Emergence of Derivative Market in India
With globalization of the financial sector, it's time to
recast the architecture of the financial market. The
liberalized policy being followed by the Government of
India and the gradual withdrawal of the procurement
and distribution channel necessitated setting in place
a market mechanism to perform the economic
functions of price discovery and risk management. Till
the mid – 1980's, the Indian financial system did not
see much innovation. In the last 18 years, financial
innovation in India has picked up and it is expected to
grow in the years to come, as a more liberalized
environment affords greater scope for financial
innovation at the same time financial markets are, by
nature, extremely volatile and hence the risk factor is
an important concern for financial agents. To reduce
this risk, the concept of derivatives comes into the
picture. Derivatives are products whose values are
derived from one or more basic variables called bases.
India is traditionally an agriculture country with
strong government intervention. Government
arbitrates to maintain buffer stocks, fix prices, impose
import-export restrictions, etc. This paper focuses on
the basic understanding about derivatives market and
its development in India.
The emergence of the market for derivatives products,
most notable forwards, futures, options and swaps can
be traced back to the willingness of risk-averse
economic agents to guard themselves against
uncertainties arising out of fluctuations in asset prices.
By their very nature, the financial markets can be
subject to a very high degree of volatility. Through the
use of derivative products, it is possible to partially or
fully transfer price risks by locking-in asset prices. As
instruments of risk management, derivatives products
generally do not influence the fluctuations in the
underlying asset prices. However, by locking-in asset
prices, derivatives products minimize the impact of
fluctuations in asset prices on the profitability and
cash flow situation of risk-averse investors.
doc_735865017.docx