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Derivatives Market in India ..Future???
This is a discussion on Derivatives Market in India ..Future??? within the HOT Debates - The Big Fight forums, part of the Management Students Voices ( MBA,BMS,MMS,BMM,BBA) category; Originally Posted by sachinkothari00707
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Hi Sachin,
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Re: Derivatives Market in India ..Future??? -
July 11th, 2008
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 morebasic variables called bases. These bases can be underlying assets (for example forex, equity, etc), bases or reference rates. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. The transaction in this case would be the derivative, while the spot price of wheat would be the underlying asset. Development of exchange-traded derivatives Derivatives have probably been around for as long as people have been trading with oneanother. Forward contracting dates back at least to the 12th century, and may well have been around before then. Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. A primary motivation forpre-arranging a buyer or seller for a stock of commodities in early forward contracts was to lessen the possibility that large swings would inhibit marketing the commodity after a harvest. The need for a derivatives market The derivatives market performs a number of economic functions: 1. They help in transferring risks from risk averse people to risk oriented people 2. They help in the discovery of future as well as current prices 3. They catalyze entrepreneurial activity 4. They increase the volume traded in markets because of participation of risk averse people in greater numbers 5. They increase savings and investment in the long run The participants in a derivatives market • Hedgers use futures or options markets to reduce or eliminate the risk associatedwith price of an asset. • Speculators use futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture. • Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets.