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However, in the Indian context, the sell side market is absent. For the segment to develop, the sellers of credit protection need to be able to hedge their risks, enabling them to quote a price for the protection they are selling. The scenarios and factors such as opening up of the insurance sector, relief to investors, tax benefits to corporate would provide the necessary impetus to the credit derivatives market to develop in India, boosting yields and lowering risk for both the corporate as well as the banking sector.

Energy Derivatives

India is the sixth largest producer and consumer of energy in the world. According to global estimates, total energy trading in the world is around $8 trillion, and growing at a phenomenal rate of 30 percent per annum. Deregulation has changed the dynamics of energy markets from a supply market at a pre-determined price to a price-sensitive market where energy is traded on exchanges. Energy commodities are fast moving, non-storage products with volatile prices. Recent casualties of major electricity generators in California has explained that companies owing physical assets or retail obligations like electric generators, power and gas distributors, and oil refiners have large physical, spot price-risk exposure that can be effectively managed and optimized using sophisticated risk management strategies.

In India, where the energy markets are plagued by losses in extraction, conversion and transmission, resulting into losses for producers, marketers and consumers, effective risk management through the use of energy derivatives has become crucial.

Participation from multiple players in the areas of production, trading and marketing of energy products will further brighten the prospects. One of the Delhi-based IT majors Vedaris provides energy trading and derivative risk management software the 'Contango' designed as an integrated solution for multi-commodity and multi-currency trading, within the energy derivatives market. The market for this product is principally gas and electricity, but also includes oil, coal, weather, bandwidth and emissions trading.

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* Contributed by -
Nidhi Sethi,
Batch of 2006,
IMT Ghaziabad.