Derivative Trading in India: A New Perspective of Risk Management

Abstract

The terminology risk management incorporates the process of identification, assessment and prioritization of risks, involves coordinated and prudent application of resources to control and minimize the risk by reducing the probability and impact of unexpected events. Derivative instruments have become increasingly important specifically in the sphere of financial risk management for last three decades. The forward contracts, futures, swap, option and other derivatives are regularly traded by financial institutions, fund managers and corporate treasurers in over the counter market. Derivatives are added to the bond issues, used in the executive compensation plans, embedded in capital investment opportunities and so on. The objectives of the research paper are to identify different hedging, speculation and arbitraging strategies using the derivative contracts, interpret how the portfolio of retail investors, High Networth Individuals (HNIs) and Qualified Institutional Buyers (QIBs) can be managed, optimized, rebalanced and monitored. The paper will also analyze how the stock portfolio can be integrated with derivative market to consolidate the position of the investors. The methodology used for preparing this full length research paper is based on secondary information available in different reputed national and international journals and real life experiences of the author from trading as well as various professional assignments handled by him. This paper will add a new dimension how derivative instruments can be used in enterprise risk management, risk management in banking as well as the portfolio risk management of the investors.

Keywords: Hedger, Speculator, forward, futures, Option