Hedging of Financial Derivatives: Contrivance to Maximize Returns

Abstract

The origin of the stock market in India goes back to the end of the eighteenth century when long-term negotiable securities were first issued. However, for all practical purposes, the real beginning occurred in the middle of the nineteenth century after the enactment of the companies Act in 1850, the advantage of limited liability that generated investor interest in corporate securities.BSE and NSE have established themselves as the two leading exchanges and account for about 80 per cent of the equity volume traded in India. There is a perception among the traders that derivatives are highly riskyand at the same time provides high returns. This paper analyzes three financial derivative products of NSE, namely, Nifty futures & options, Gold ETF and Currency futures, in combination as a basket of derivative products, for two opposite trend periods. Though it is highly risky to trade derivative products, it is essential to prove that the risk can be reduced at a maximum level without affecting the returns. The researcher attempts to examine the risk and returns of these products individually and in combo by applying few of the option strategies to prove that the derivatives though risky, it is a viable opportunity to enhance returns or minimize the loss. This paper will help the traders, investors and academicians to understand the derivatives market as also the effective applicability of the trading techniques as well,