Risk Management through Derivatives in India

1666 WordsFeb 2, 20187 Pages
Evolution: With the globalization of trade and free movement of financial assets, risk management through derivatives became a necessity in India. In the early nineties in India the economic liberalization provided the economic rationale for the introduction of forex derivatives. Many business houses actively approached foreign markets not only with their products but also as a source of capital and direct investment opportunities. In 1993 there was limited convertibility on the trade account so the environment became more conducive for the introduction of these hedge products. The development in the forex derivative market was carried parallel along with the steps taken to reform the Indian financial market. In 1992 FII’s were allowed to invest in Indian equity and debt markets and in the following year foreign brokerage firms were allowed to operate in India. NRIs (non-resident Indians) and OCBs (Overseas Corporate Bodies) were allowed to hold together around 24% of the paid-up capital of the Indian companies and it was further raised to 40% in 1998. The Indian companies were encouraged to issue ADRs/GDRs in 1992 to raise foreign equity. An Indian entity was allowed to make investments in overseas joint ventures and wholly owned subsidiaries to a limit of US$ 100 million during one financial year. Investments in Nepal and Bhutan were allowed to a limit of INR 3.5 billion in one financial year. Companies located in Special Economic Zones can invest out of their balances
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