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Introduction

Global financial markets have been innovating and acquiring new shapes and dimensions. At every stage of development there have been two core factors that have driven mankind to ideas and innovations. These are increasing returns and reducing risks from all aspects of life. There has been continuous innovations and development in the financial markets on these two factors.

Derivatives were an important development in the financial markets all over the world. It was aimed at increasing the returns to the investors and at the same time it hedged their risks. These instruments have become very popular all over the world. They provide investors an outlet to protect themselves from the troughs and crests of the financial markets. The derivatives market has seen a phenomenal growth in the past few years. With a modest beginning they have become important instruments of hedging and can make or break markets.

Introduction to Derivatives

Derivatives initially emerged as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form for almost three hundred years. Financial derivatives came into the limelight in the mid 1970's due to the growing instability in the financial markets. Since then financial derivatives have become very important and account for about two-thirds of the total transactions in the derivatives market. In recent years the derivatives market has grown tremendously in terms of variety of instruments available, their complexity and also their turnover.

The Derivatives Market Serves Certain Economic Functions

It helps in transferring the risk from those who have them but may not like them to those who have an appetite for them: -

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* Contributed by -
Nishant Bachkheti & Aarti Nagarajan,
Core Committee Members, Fin-Niche,
IMT, Ghaziabad.