Usage of Derivatives by Non Financial Firms

By

ACKNOWLEDGEMENT

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible.

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

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ABSTRACT

The research study has been conducted in order to analyze the usage of derivatives by the non financial firms within the emerging markets in the case of India. The usage of derivatives has been significantly increased by the non financial firms in order to mitigate the risk of volatility in the interest rate and foreign exchange currency. The firms use the hedging and speculation in terms of the derivatives interchangeably in order to reduce the risk. The most common reason for which the derivatives have been used by the firms is volatility in the interest rates and the currency exchange rates. The research study has identified different kinds of derivatives that are used by the investors in the financial markets. These are the Futures contract, Forwards contract, Swaps and the Warrants. The main purpose of using the derivative by the non financial firms is the risk management. The derivatives help the management to perform their functions efficiently while minimizing the fluctuations in the market prices of the interest rate and the currency rates. In India, the derivative market has been established for a long time now that has reduced the risk minimum levels.

TABLE OF CONTENTS

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER 1: INTRODUCTION1

Background of the Research Study1

Motivation of the Research Study1

Usage of Deivatives1

Problem Statement4

Aims and Objectives of Research Study4

Significance of the Research Study5

Rationale of the Research Study6

Research Question7

CHAPTER 2: LITERATURE REVIEW8

Derivatives as a tool8

Usage of Derivatives in Indian Economy9

Uses of Derivatives13

Hedging14

Speculation14

Currency Rates15

Over the Counter Markets (OTC) in India16

Evolution of Trade Counter Derivatives18

Exchange Rates21

Recent Developments in Exchange rates23

Changes in Derivatives Usage Among Indian Firms24

CHAPTER 3: RESEARCH METHODOLOGY25

Introduction25

Research Process25

Research Methods26

Rationale for a Qualitative Study29

Limitations of the Qualitative Study30

Inclusion and exclusion criteria31

Search terms - key terms31

Additional Online searches31

Management32

Scope of the Research32

Search rationale33

Critical Appraisal tool33

Appraisal limitations33

Underlying assumptions34

Possible alternative to the proposed methods34

Any difficulties and uncertainties35

Explanation of the rationale for the proposed methods35

Reliability/Dependability36

Validity37

Ethical consideration38

Limitations of Research39

Suggestions39

CHAPTER 4: DISCUSSION AND FINDINGS40

Product-wise Turnover Distribution of NSE41

Statewise Turnover of Derivatives in India42

Statewise Usage Of Spots In India43

Statewise Usage of Derivatives in India44

Number of Derivative User by Firm Size45

Ten Most Active Underlying46

Findings of the Literature Review46

Forward Contracts47

Future Contracts47

Options Contract47

Swaps Contract48

Price Volatility51

Globalization52

Advancement in Technology52

Government Actions for Derivatives Market55

CHAPTER 5: CONCLUSION57

REFERENCES61

BIBLIOGRAPHY64

CHAPTER 1: INTRODUCTION

Background of the Research Study

The usage of derivates by the non-financial firms is a rising trend that has been observed largely in many countries for the past few years. Usage of derivatives is an important aspect in the markets to reduce the risk in the firm's operation. The derivative is the financial instrument that is generally used by the firms in order to ...