Financial Risk Management
The Relationship Between Derivatives Market and Financial Market Development: Innovation Accounting Analysis

Article Details
Pub. Date : Dec, 2021
Product Name : The IUP Journal of Financial Risk Management
Product Type : Article
Product Code : IJFRM021221
Author Name : Anu K M
Availability : YES
Subject/Domain : Finance Management
Download Format : PDF Format
No. of Pages : 10



This paper studies the feasibility of rainfall risk market in India. Perceptional studies on feasibility of creation of rainfall risk market are essential to understand the ecosystem of our capital markets to design, develop The paper examines the relationship between derivatives market and financial market development. The derivatives market development was assessed through the role of spot market, capital market, financial intermediaries and financial deepening. Variance decomposition was used to assess the relationship between financial market indicators and derivatives market, and impulse response analysis was also employed in the study. The required data were collected from April 1998 to March 2021. The study reveals that capital market growth influences derivatives. The result of the impulse response analysis shows that derivatives do not influence capital market growth; rather, it is the other way around. Financial deepening creates a platform for the creation of new derivative products and calls for more risk management techniques.


The financial market venture has always been to maximize returns and minimize risk. Derivatives are among the vanguard of innovations in the financial securities industries and aim to increase yields and reduce risk (Barot and Gajjar, 2013). They offer an outlet for investors to protect themselves from the vagaries of the financial securities markets. Equity derivatives were traded on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) from June 2000. Financial derivatives, whose value is derived from the underlying asset such as stock or indices of stock, are primarily designed as risk management tools. Through the role of derivatives products, it is possible to shift the price risk partially or in full. Trading in derivatives has now become an integral part of global financial markets. Recent decades have witnessed a rise in the growth and development of derivatives markets in the world. The growing financial links among the countries and globalization of financial markets have provided a platform for the introduction of risk management tools like derivatives in India.

Increased globalization and financial integration have led to volatility and uncertainty in many commodities and in the financial market. To palliate the effects of these fundamental risks, financial derivatives were introduced. The price discovery and risk transfer function of derivative instruments in emerging markets could assist in decreasing price deformation by