Introduction
Risk is a feature of all commodity & capital markets. Since last 2 decades many fold increase in the volume of international trade & business has been seen due to the ever-growing globalization & liberalization in the world. So, financial markets have experienced variations in interest rate & exchange rates, stock market prices thus exposing the corporate world to a state of growing financial risk. Increased financial risk exposes a profitable organizational to losses. Derivatives provide an effective solution to problem of risk caused by uncertainty & volatility in the underlying asset of the derivative. They are risk management tools which help in transferring the risk effectively. They are instruments which have no independent value to themselves. Its value depends on the underlying asset which may be financial or non-financial.
Literature Review
(Mrinmayee Gunti, 2016)
He found that the derivatives are risk management tool that support in effective management of risk by various stockholders. Derivatives provide a chance to transfer risk from the one who wish to avoid it, to one who wish to agree it. India’s experience with the introduction of the equity derivatives market has been really encouraging and successful.
Nagaraju 2014
Study on investors’ perception towards derivative markets & it’s Instruments. The study concludes that before making of investment the investor should take effective measurements and determining the factors of risk for investment decision on particular financial instruments.
(Dr. Babraju 2014) has done the analyses on the perception of investor towards derivatives as an investment avenue. (D.V. Gakhar 2016) study on Impact on Volatility and Investor Perception explores the investors awareness and investors investment decisions and risk taking ability on derivative instruments plays an important role in the development of trading activities in the derivative market. (Gopal Krishna U M 2019) study explores the Investors investment behavior and risk taking ability on various investment avenues.
(Pasha, S. A. M. 2013). A strive is made by the researcher to comprehend what type of perceptions had by means of retail traders in India based totally on Andhra Pradesh State reference with a pattern measurement of five hundred respondents by way of the usage of easy share bar diagrams. (Kukreja, G. 2012) Aims to measure the investors’ appreciation toward Indian capital market with reference to National Capital Region (NCR) traders of India. (Rakesh, H.M. 2015). Study Intends to locate choice stage of traders on a number of Capital Market instruments. (Pallavi, E. V. P. A. S., & Raju, T. K. 2014). The derivatives market is witnessing first-rate boom in India. The statistical information displays that the whole turnover of futures and choices in NSE market are Rs 67510.02 billion and Rs 247820.01 billion respectively through 2012-13. (Paraschiv, D., & Raghavendra, S. 2009, March).1 Introduced a inventory scanner evaluator for shares and options. (Senthil, 2015) attempts to study the investor’s awareness and perception about commodity futures market. (Manrai, 2015) analyzed the investor’s behavior towards derivative markets in Indian context. (P. Periasamy, 2018) investigated the perception of investors towards Indian commodity derivative market with inferential analysis in Chennai city. (Natividad Blasco, Pilar Corredor, Sandra Ferreruela, 2012) conducted a study to explore herding behavior to identify relationship between rational and emotional components and to test whether past return indirectly drives herding behavior.2, 3, 4, 5, 6, 7, 8
Research Gap
To find the gap between what potential the derivative market offers & how much investors are aware & willing to take benefit of the same.9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19
Research Objectives
To analyze the operations of futures and options in financial services sector.
To find the gap between what potential the derivative market offers & how much investors are aware & willing to take benefit of the same.
To find the profit/loss position of futures buyer and seller and also the option writer and option holder.
To find out the reasons for preferring derivative instrument.
Research Methodology
Table 1
Data Analysis
T — test in the secondary data. And Factoral Anova, Chi – square test are applied in the primary data. 3 sectors are taken in the secondary data & T-test is applied in all the 3 sectors. In primary data, Anova & Chi-square test is applied in 5 Questions.
Secondary data
Financial services sector
HO: There is no significant difference between the actual price on day of maturity & the forward price.
H1: There is significant difference between the actual price on day of maturity & the forward price.
Table 2
Fashion & retail industry sector
HO: There is no significant difference between the actual price on day of maturity & the forward price.
H1: There is significant difference between the actual price on day of maturity & the forward price.
Table 3
Information technology sector
HO: There is no significant difference between the actual price on day of maturity & the forward price.
H1: There is significant difference between the actual price on day of maturity & the forward price.
Table 4
Primary data
Income & percentage of monthly income available for investment Chi Square test of independence - X2 = ∑(fo – fe)2 / fe
H0: Investment rate of investors is independent on investors income.
H1: Investment rate of investors is not independent on investors income.
Table 5
Table 6
X2 = 51.8456
Reject the null hypothesis.
Findings
There is an interaction present between the no. of times an investor invests & the risk capacity possessed by him / her.
There is a relationship between the income & investment pattern of investors.
43.8% investors main purpose of investing in derivatives is to control risk & 62.5% investors point of attraction for investment is high returns, but they are unaware of the strategies with which they can make their investments high return yielding.
59% investors have got “moderate but not acceptable” returns from their investment in derivatives market.
28% investors prefer 1 month maturity period so it can be interpreted that liquidity is also their preference.
An investor who has the capacity to take more risk & speculate more, would take multiple chances with same or different strategy.
While selling call or put both there is Unlimited Loss & Fix Profit for both seller & buyer.
While buying call or put both there is Unlimited Profit & Fix Loss.
In all the 3 sectors the null hypothesis was accepted & the interpretation is that there is no significant relationship between the actual & future price.
So, it is identified from the study that there is a huge gap between what the derivative market has to offer, its potential and investor perceptions & choices in the market & investors awareness about this market.
This gap exists as investors are not aware of how derivatives operate & the strategies using which they should make their investment decisions.
They can satisfy investors any kind of investment purpose be it fix returns with unlimited loss or high returns with fix loss condition or any other.
Investors presume derivatives to be a risky investment whereas, they actually have the potential to offer short terms returns with a proper strategy & calculative decision.
Discussion
Investors are expecting more returns from derivative market & for the same they are willing to take the required risk, still they are getting moderate returns because they are not having the complete & required knowledge for making the investment & earning returns. Our analysis & findings of secondary data shows that derivatives are used for the purpose of hedging the risk & they can yield returns as per the risk profile of investors. The primary data analysis shows that investors are preferring to enter into stock futures more than any other. However, the investors haven’t earned the returns acceptable to them probably cause their understanding of investing & strategies which should be utilised are not correct. For hedging & mitigating risk, investors may also choose options contract cause of the flexibility that options provide. Options as the name suggests gives the holder the right to exercise or not exercise it. So, if the holder finds the contract previously entered into to be unfavourable & loss making, they may also withdraw there position & save the loss. Despite of this benefit, investors with high returns expectation are preferring futures only, which indicates the incomplete knowledge & understanding of the investors about the derivatives.
Conclusion
The conclusion of the above research is that investors are clear above their return & risk profile & also the derivatives can be high returns yielding but haven’t resulted in the expected returns cause of incomplete knowledge & expertise of investors. 43.8% investors main purpose of investing in derivatives is to control risk & 62.5% investors point of attraction for investment is high returns, but they are unaware of the strategies with which they can make their investments high return yielding. 59% investors have got “moderate but not acceptable” returns from their investment in derivatives market. There is no significant relationship between the actual & future price in all the 3 sectors under study.
