Role of Derivatives in India's Financial Development
- 01 April, 2012
- IGC Research on India
The annals of financial history are littered with stories of corporations and financial institutions which collapsed when a deterioration in market conditions led to massive losses in the derivatives portfolio – occasionally, even in cases where the derivatives were being used to hedge existing exposures. The potentially lethal cocktail of leverage and volatility makes it vital that users understand fully the risks of the instruments, and regulators the systemic impact of volatility spikes. India’s derivatives markets, both over-the-counter and exchange traded, have seen rapid growth over the last decade, and with relatively few sputters. The successes are visible and real – several Indian exchanges rank among the world’s top exchanges in terms of number of derivatives contracts traded; and there have been no large scale derivatives disasters of the sort that have roiled the advanced economies. But problems lurk not far beneath the surface. This project peels away the layers and discusses the role of derivatives in financial markets and their development.
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