DERIVATIVE SEGMENT -3

Factors influencing the growth of derivative market globally

Over the last decades, the derivative market has seen phenomenal growth. many derivative contracts were launched at exchanged across the world. some of the factors driving the growth of financial derivatives are :

Increased fluctuation in underlying asset prices in financial markets.
Integration of financial markets globally.
The use of the latest technology in communication has helped In the reduction of transaction costs.
Enhanced understanding of market participants on sophisticated risk management tools to manage risk.
Frequent innovations in the derivative market and newer applications of products.

In the modern world , there is a huge variety of derivative products available . they are either traded on organised exchanges or agreed directly between the contracting counterparties over the telephone or through electronic media . over the counter market is not a physical marketplace but collection of brokers dealers scattered across the country. The OTC derivative markets have banks , financial institution and sophisticated market participants like hedge funds, corporation and high net worth individuals .

OTC market – The following features compared to exchange-traded derivatives :

1. Contracts are tailor-made to fit in specific requirements of dealing counterparties.

2. The management of counterparty risk is decentralized and located within individual institutions.

3.There are no formal rules or mechanisms for risk management to ensure market stability and integrity and to safeguard the collective interest of market participants.

4. Transactions are private with little or no disclosure to the entire market.

On the contrary, exchange-traded contracts are standardized and traded on organized exchanges with auction platforms. A clearing house/clearing corporation guarantees contract performance.

-By

A Gowrish R Bhat