AN ANALYTICAL STUDY OF DERIVATIVES AND THEIR ROLE IN THE STOCK MARKET
DOI:
https://doi.org/10.29121/granthaalayah.v14.i4.2026.6915Keywords:
Derivatives, Hedging, Risk Management, Price Discovery, Liquidity, Futures, OptionsAbstract [English]
The markets are now transforming as a result of the information age, which makes information accessible to everyone involved in the market. Advanced mathematical models that analyse patterns and trends have become commonplace in most financial institutions. The proliferation of derivatives, financial instruments whose value depends on the performance of an underlying entity, such as an asset, a rate, or an index, has grown and is gaining momentum. The volume has grown, and so, too, has the variety of instruments, the number of stock index options, for example, and the number of types of interest rate swaps. Within the last 10 to 15 years, the number and variety of these have grown significantly. The use of derivatives has led to increased attention and interest from government bodies, regulators, and academic researchers. Derivatives are currently the most widely traded financial instruments worldwide, with swaps the most widely used. Even though the market for commodity derivatives has grown rapidly, equity-index derivatives are still the most actively traded, especially in the over-the-counter (OTC) market. Warrants, options, and total return swaps are other types of equity derivatives noted. The mushrooming of the secondary market for credit derivatives has prompted banks to establish separate credit departments, often headed by designated officials regarded as experts in credit risk management. In the case of credit derivatives, in particular, it has become commonplace to focus transactions in certain departments. Credit derivatives constitute contracts with a predefined agreement concerning the credit risk of a specified reference obligation: usually, the consequence of a default (failed payment or bankruptcy) involving the reference creditor or reference entity. Using credit derivatives, credit risk can be transferred from one institution to another without the sale or purchase of the underlying credit. (Agrawal, 2021).
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