Ravi Todi, president of the Merchants' Chamber of Commerce (MCC), said at a seminar on derivatives trading, organised by the chamber, "It is the small investors who are likely to be hugely attracted by such instruments and who are likely to use them more as a speculative instrument rather than a hedging instrument. With their lack of awareness about the technicalities of derivatives trading it will lead to tremendous financial and social pains."
Manoj Vaish, chief executive officer, BSE derivatives segment, said, "Derivatives allow you to manage these risks more efficiently by unbundling the risks and allowing either hedging or taking only one risk at a time".
A derivative is normally understood to be a financial instrument and its value depends on the value of other, more basic underlying assets. Underlying assets can be commodities, currency, equity, precious metals, and foreign exchange rates or interest rates.
Derivatives allow corporations and institutional investors to manage effectively their portfolio of assets and liabilities through the intsruments stock index futures or index options.
Also by providing the investors and issuers with a wide array of tools for managing risks and raising capital, derivatives improve the allocation of credit and sharing of risk in the global economy, lowering the cost of capital formation and stimulating economic growth.
Trading in standard derivatives such as forwards, futures and options, however, is already prevalent. "The concept of options and futures is well ingrained in the Indian equities market and is not as alien as it is made out to be . Complex strategies of options are traded in many exchanges which are called Teji-Mendi, Jota-Phatak, and Bhav-Bhav in different places," pointed out Todi.
