Derivatives – A Double Edged Sword

Abstract

The Financial Derivatives have earned an extremely significant place among all financial instruments. The derivative segment has registered an explosive growth in India since their launch in year 2000. The derivative market turnover in India has grown from Rs.2365 Cr. in 2000 -2001 to Rs.16807782.22 Cr. in 2012-13. This paper studies the advantages and disadvantages of Derivatives as a Risk management tool, when it is dealt with understanding the market conditions and other macroeconomic variables. This paper analyses the market shares of Derivatives in India and also the different types of derivatives available in the Indian financial markets. The objective of the paper is to understand the benefits to be attained by using Derivatives as Risk management tool rather than banning it as a lethal or complex instrument. The challenge today is to design a framework to mitigate Risks and promote transparency of the Derivatives market.