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Derivatives Project

Derivatives Project

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Published by: 47198666 on May 02, 2010
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The need for derivatives as hedging tool was first felt in the
commodities market. Agricultural F&O helped farmers and PROCESSORS
hedge against commodity price risk. After the fallout of BRITAIN WOOD
AGREEMENT, the financial markets in the world started undergoing radical
changes, which give rise to the risk factor. This situation led to development
of derivatives as effective "Risk Management tools".
Derivative trading in financial market started in 1972 when "Chicago
Mercantile Exchange opened its International Monetary Market Division
(IIM). The IMM provided an outlet for currency speculators and for those
looking to reduce their currency risks. Trading took place on currency.
Futures, which were contracts for specified quantities of given currencies,
the exchange rate was fixed at time of contract later on commodity future
contracts was introduced then followed by interest rate futures.
Looking at the liquidity market, derivatives allow corporate and
institutional investors to effectively manage their portfolios of assets and
liabilities through instruments like stock index futures and options. An
equity fund e.g. can reduce its exposure to the stock market and at a
relatively low cost without selling of part of its equity assets by using stock
index futures or index options. Therefore the stock index futures first
emerged in U.S.A. in 1982.

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