Derivatives have made the international and financial headlines in the past for mostly with their association with spectacular losses or institutional collapses. But market players have traded derivatives successfully for centuries and the daily international turnover in derivatives trading runs into billions of dollars.
Are derivative instruments that can only be traded by experienced, specialist traders? Although it is true that complicated mathematical models are used for pricing some derivatives, the basic concepts and principles underpinning derivatives and their trading are quite easy to grasp and understand. Indeed, derivatives are used increasingly by market players ranging from governments, corporate treasurers, dealers and brokers and individual investors.
Indian scenario
While forward contracts and exchange traded in futures has grown by leaps and bound, Indian stock markets have been largely slow to these global changes. However, in the last few years, there has been substantial improvement in the functioning of the securities market. Requirements of adequate capitalization for market intermediaries, margining and establishment of clearing corporations have reduced market and credit risks. However, there were inadequate advanced risk management tools. And after the ICE (Information, Communication, Entertainment) meltdown the market regulator felt that in order to deepen and strengthen the cash market trading of derivatives like futures and options was imperative.
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