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Derivatives are generally used to hedge risk. They are used for speculation purpose. The article tells how significantly they can be used to hedge risk.
Derivatives are gaining importance due to increased volatility in the Capital Market and the Foreign Exchange market. The Stock Index Futures and options were introduced in 1982. Since then financial futures have spread to various developed and emerging markets. Those are recognized as the best and most cost-efficient way of risk hedging in certain types of commercial and financial operations. In 1990, about four contracts in futures changed hands in the US exchanges. In last decade, trading jumped from 98 million to over 276 million contracts. It has been found that the Futures Contract consist of 60-70% of the total trading.
In India, in Kochi, we have a stronger-dollar rupee forward market with contracts being traded for near month, next month or the far month. Daily trading volume of this forward market is around $500 mn. Futures Market exists in six commodities—castor seed, hessian, gur, potatoes, turmeric and pepper. The pepper exchange, which is in Kochin, is being upgraded as "International Pepper Futures Market" which will accept orders from all over the world. In September 1994, the "Kabra Committee" recommended that futures trading should additionally be permitted in 17 commodities. Thus, Futures Market has so far been in the commodities and not equity. LC Gupta Committee has conducted research on derivatives. The Committee submitted its report in 1998, which has then accepted by Sucurities and Exchange Board of India (Sebi). Recently, a commodities exchange has also been started in Bangalore for coffee. There are about 16-17 recognized commodities exchanges in the country but only some of them are working regularly. Now the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are ready to start trading in stock index futures in India. The term "Derivative" indicates that it has no independent value, i.e. |
