A Study On Financial Derivatives With Special Reference Essay

The Balance of Payments in India mainly relies on services exports, remittances and the course capital flows, both foreign direct investments (FDI) and FII. It is very essential that all market participants, such as banks and other intermediaries be provided with the wherewithal so that they can undertake a risk management in a way that is scientific. One of the ways to access domestic, foreign exchange markets is to hedge on the underlying foreign exchange exposures. In addition, the facilities that are available as the booking of forward contracts were included in the domestic forex market in order to evolve and acquire volumes and depth (Sumanth, 2012). Some of the newer hedging instruments have put in place swaps and options in the

Hedging is a significant measure of financial risk management. Since the 1970s, the increasing number of powerful companies started to control the risk of the exchange rate, the interest rate and commodity by using financial derivatives. ISDA (2013) based on the Global 500 Annual Report 2012 survey found that 88 percent of companies use foreign exchange derivatives. Modigliani & Miller (1958) believed that if the financial markets were under perfect conditions, for instance, there was no agency costs, asymmetric information, taxes and transaction costs, hedging would not increase the company 's value because investors can hedge by themselves. However, a large number of practical studies have shown that hedging is beneficial

American Barrick is the largest gold producer in North America. The implementation of the gold-hedging program differentiated the firm from other major gold rivals and improved its reserve and financial strength. In 1995, American Barrick ’s latest gold find necessitated the company to determine a new hedge strategy for its gold production.

The current 50% hedging policy executed at the fund level has served well for OTPP for the past ten years, contributing to the fund’s positive returns. The FX Hedge Program not only has minimized the downside risk, but has also limited the upside potential. If OTPP decided not to implement a hedging program in 1996, they would have lost about $983 million CAD over the ten year period (1995-2005) which is valued at 2% of the portfolio. With the hedging program, OTPP was able to reduce the overall loss to about $469 million CAD, but also limited the gain from the depreciation of the pound.(Exhibit 1) Hedging is an excellent short-term risk minimizing strategy for long term investors, sustaining a continual payout of pensions during volatile times in OTPP’s invested currency markets. Currently, approximately 21% of OTPP’s net assets are exposed to foreign currency risk. Consequently, it is essential that OTPP maintain a risk management program of hedging, as slight currency fluctuations can significantly affect the value of the fund. Similarly to continual renewal of swaps, hedging can be a very expensive risk management strategy.

The presentation was scheduled for the first week of December 1990. Mr. Pross outlined the use of various derivatives, noting that they differed widely in their ability to reduce risk. If the company was, say, placing a large bid to buy a building abroad, one might prefer to use foreign currency options to hedge the currency risk in the event the deal fell through. He argued, however, that foreign currency futures were best suited to hedge the fluctuations in revenues arising from currency movements. Mr. Pross proposed a plan to hedge currency risk using futures which

Analyze the derivatives market and determine the use of derivatives to efficiently manage investment risks in an investment portfolio.

In order to reduce risk, the company is using two hedging derivatives: forward contracts and put options to sell dollars. The aim of the paper is to determine an appropriate hedging policy which answers two main questions: how much to hedge, and in what proportions of forwards

Nestlé S.A. is a Swiss company and owns a prestigious position being the world’s leading nutrition, health and wellness group (Nestlé, 2016). According to its annual report (2015), this company is exposed to many risks caused by movements in foreign currency exchange rates, interest rate and market prices. The foreign exchange risk comes from transactions and translations of foreign operations in Swiss Francs (CHF). The interest rate risk faces the borrowings at fixed and variable rates. The market price risk comes from commodity price and equity price. The former risk arises from world commodity market for the supplies of coffee, cocoa beans, sugar and others. The later risk arises from the fluctuations of the prices of investments held. (Nestle annual reports, 2015). Thus, financial derivatives instruments are used by this multinational corporation in order to hedge these risks.

Financial market instruments are essential for hedging the occurring risks of business corporations. There is a large market for financial instruments, such as the derivatives that are used to hedge commodities, currencies, equities and interest rates. World-exchanges (2014) reports about a total amount of 22 Billion of Exchange Traded Derivatives contracts being in the market in 2013. This essay attempts to determine the present risks by analysing the production cycle of a salmon farming company, Loch Duart and to provide the possibilities to hedge these risk using derivatives.

Higher use of derivatives corresponds to greater systematic risk, there is a positive relationship between the derivatives and risk in trading as well as hedging. The figures below shows that this positive relationship is stronger for the large business holding companies (BHC) than for small BHC. This indicates that the large BCH with operations in brokerage, asset management and trading primarily uses derivatives to derive their gains further exposing them to systematic risk. The small BCH results indicate that they use derivative to a larger extent to hedge against the systematic risk.

Most firms hedge at least some of their risks. Hedging can take two basic forms—namely, natural hedging and hedging by means of derivative instruments. The use of derivatives as hedges has expanded greatly in recent years.

-Brokerage firms manage and facilitate the purchase of stocks, bonds, and other types of investments.

Hedging can be defined as a risk management mechanism or strategy which is used to prevent the chances of incurring losses which arise as a result of fall in prices commodities or currencies. It is a technique which is majorly used by the investors in protecting their capital against the effects of the economic situations such as inflation whereby the investors invests in the high yield financial instruments or take a position to cushion them against such effects (Investopedia, 2012).

In 1996, the Indian parliament passed the Derivatives act, which allowed online transaction of shares, thus making it much easier for all stakeholders to perform their task. Online trading, in simple terms, can be understood as buying and selling securities through the internet. Such trading commonly necessitates an online trading platform offered for order initiation and completion. This trading platform provides the investor with all the trading information necessary to make informed investment decision at any point of time. Securities trading can be done with a click of a few buttons and the investor has access to live market watch functionalities and intraday research dashboard with quick login.

During the last 30 years, derivatives have become increasingly important and widely used in the field of finance all around the world. Their increasing values made them impossible to be ignored because they have become much bigger than the stock market when measured in terms of underlying assets in so much that Global corporations and financial intermediaries trade billions of dollars of derivative contracts on a daily basis across a range of products and markets (Batten and Wagner, 2012).