ROLE OF DERIVATIVE SECURITIES TO MANAGE THE RISK AND

TO EXPLOIT THE OPPURTUNITIES TO ENHANCE RETURN

PRESENTATION BY

s.sravani

A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset.

DERIVATIVES

ROLE OF DERIVATIVES IN SECURITIES

MANAGEMENT OF RISK

PRICE DISCOVERY

EFFICIENCY IN TRADING

HIGHER TRADING VOLUMESEXPLOIT OPPURTUNITIES TO ENHANCE RETURNSPRICE STABILISATION

SPECULATION

CONTROL MARKET ACTIVITIES

ACTS AS CATALYST

MANAGEMENT OF RISK

Financial derivatives allows for the Efficient management of financial risks and can help to ensure that value enhancing opportunities will not be ignored.

Risk management is not about the elimination of risk rather it is about the management of risk. Financial derivatives provide a powerful tool for limiting risks that individual and organization face in the ordinary conduct of their businesses. Effective use of derivatives can save cost and it can increase return from the organization.

EXPLOIT OPPURTUNITIES TO ENHANCE RETURNS

Derivative securities such as options, forwards and futures, and swaps can provide firms and investors to exploit opportunities to enhance returns that might not otherwise be available.

PRICE DISCOVERY

Price discovery means revealing information about future cash market prices through the future markets. Derivative markets provide a mechanism by which diverse and scattered opinions of future are collected into one really discernible number which provides which provide a consensus of knowledgeable thinking.

PRICE STABILISATION

Derivative market helps to keep a stabilizing influence on spot prices by reducing the both term fluctuations. In other words, derivatives reduces both peak and depths and leads to price stabilization effect in the cash market underlying assets.

EFFICIENCY IN TRADING

Financial derivatives allow for free trading of risk components and that leads in improving market efficiency. Traders can use a position in one or more financial derivatives as a substitute or position in the underlying instruments. In many instances, traders find financial derivatives to be more attractive than the underlying security.

However these instruments acts as a powerful instruments for knowledgeable traders to expose themselves to calculated and well understood risks in search of a profit.

Financial derivatives are considered to be risky . If not used properly, these can lead to financial destruction in an organization.

HIGHER TRADING VOLUME

Derivatives due to there inherent nature, are linked to the underlying cash markets. With the introduction of derivatives, the underlying markets witnesses higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk.

CONTROL MARKET ACTIVITIES

Speculative investors shift a more controlled environment of derivatives market. In the absence of an organized derivative market speculators trade in the underlying cash markets. Managing, monitoring and surveillance of the activities of various participants becomes extremely difficult in these kinds of mixed markets.

ACTS AS CATALYST

An important incidental benefit that flows from derivatives trading is that it acts as catalyst for new entrepreneur activity. The Derivatives leave a history of attracting many bright, and well educated people with an entrepreneurial attitude. They often encourage others to enter into business and create new products and employment opportunities , the benefit of Which art immense.