3.

11 FACTORS CONTRIBUTING TO THE GROWTH OF DERIVATIVES

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Over the last three decades, the global derivatives market has been a
phenomenal growth. Large variety of derivative contracts has been launched at exchanges
across the globe. The explosive growth in derivatives in the recent past is a consequence
of number of factors. The important factors driving the growth of derivatives are:

i. Increased price volatility in the underlying assets in financial markets.

ii. Increased integration of national financial markets with international financial
markets i.e., globalization of markets.
iii. Technological advancement, improvement in telecommunication facilities and sharp
declining in their costs.
iv. Development of more sophisticated risk management tools, providing a wider
choice of risk management strategies.
v. Innovations in the derivatives markets in terms of transformation of thoughts into
ideas, the application of these ideas to produce new and improved processes and
products in financial markets.
vi. Regulatory changes in financial derivative market has fostered by an atmosphere of
deregulation of financial sector and advances in financial theory to have pinnacle of
financial derivative market. A number of financial theories, formulae, methods,
valuation models and strategies have been developed to give extra mileage in the
progress of financial derivative market.
3.11.1 The below picture portrays the factors driving growth of derivatives in India

International and national integrated

Price volatility regulation approach

Development of
sophisticated risk Factors Driving Technological
management tools advancement
Growth of Financial
Derivatives Market in
a
Regulatory Changes
Innovations in the Derivative
Market