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The introduction of financial derivatives in capital markets took off so as to control the volatility, thereby, providing a more controlled environment to the investors which can result more investment in capital markets. Thus, financial derivatives, most notably forwards, futures and options came into spot-light in the post-1970s period by reason of growing instability in the financial markets which was the reflection of high volatility in exchange rates and interest rates. Through the use of derivatives, it has been possible to partially or fully transfer the risk by locking-in the asset prices. During the mid-eighties, financial derivatives became the most active derivative instruments, generating volumes many more than the commodity futures. Since their emergence, these products have become so popular that by 1990s, they accounted for two-thirds of the total transactions in derivatives products. In the recent years, the market for financial derivatives has grown tremendously in terms of the variety of instruments available, their complexity and also turnover. In the class of equity derivatives, the world over, futures and options on stock indices have gained significant popularity than on individual stocks, especially among institutional investors, who are major players of index-linked derivatives, even small investors find these useful due to high correlation of the popular indices with various portfolio. |
