| Financial derivatives are risk management instruments that derive their value from an underlying asset such as interest rates, government bonds or currencies. Financial derivatives are relatively new financial instruments; having come about in the early 1970s. There were a number of actors that helped financial derivatives to gain popularity, including: The reinstitution of variable monetary rates, the rise of computer technology and the globalization of markets and economies. Financial derivatives allow investors to hedge risk when investing in asset classes that are subject to unexpected and unpredictable price fluctuations. Some derivatives gain their value from commodities that are not considered financial derivatives such as oil, natural gas or corn. Financial derivatives are increasingly tracked through broader indexes that emulate securities indexes. There are several categories of financial derivatives that are widely used in today's market; these include: Futures and forwards; options, and; swaps. Financial markets are very innovative; the rise in popularity of derivatives instruments exemplifies how creatively markets are able to package and manage risk. There is seemingly no end to the ways that assets can be sliced and bundled to mitigate risk. Derivatives are instruments that help investors manage risk particularly where there is volatility. In India, the emergence and growth of derivatives market is relatively a recent phenomenon. Since its inception in June 2000, derivatives market has exhibited exponential growth both in terms of volume and number of traded contracts. The market turn-over has grown from Rs.2365 crore in 2003-2004 to Rs.11010482.20 crore in 2012-2013. Within a short span of eight years, derivatives trading in India has surpassed cash segment in terms of turnover and number of traded contracts. The present study encompasses in its scope an analysis of historical roots of derivative trading, types of derivative products, regulation and policy developments, trend and growth, future prospects and challenges of derivative market in India. Some space is devoted also to a brief discussion of the status of global derivatives markets vis-a–vis the Indian derivatives market. |