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Future Trends and Recommendations
The decision about whether to use derivatives should be driven, not by the company's size, but by its strategic objectives. It is important that all users of derivatives understand how their contracts are structured, the unique price and risk characteristics of those instruments, and how they will perform under stressful and volatile economic conditions.
To increase market transparency improved information on the size and structure of the derivatives market should be provided. Internationally consistent market statistics on the notional amounts and gross market values outstanding of broad categories of foreign exchange, interest rate, and equity-based derivative instruments should be provided. This would benefit individuals as well as organizations in better prediction of the global financial activity.
A careful risk management study in respect to the corporate goals with complete market stimulation is very necessary for participating in the derivatives market. Without this study the use of derivatives can be dangerous. The long-range objectives of the firm might not be met. Moreover this could also lead to unsafe and unsound practices that could lead to the organizations insolvency. It may be wise to stay away from the more exotic instruments, unless the risk/reward tradeoffs are clearly understood by the firm's senior management and its independent risk management review team. Exotic contracts should not be used unless there is some obvious reason for doing so. But when used wisely, financial derivatives can increase shareholder value by providing a means to better control a firms risk exposures and cash flows.
Concluded.
* Contributed by -
Nishant Bachkheti & Aarti Nagarajan,
Core Committee Members, Fin-Niche,
IMT, Ghaziabad.
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