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Website: www.ijsrm.in ISSN (e): 2321-3418
Abstract
The study compares the equity, commodity, and currency derivatives in India evidence from future
market. This study focus on the risk and return associated with derivatives used in equity, commodity, and
currency market in India. The average and standard deviation to access the risk and return factor and also
comparative tool for correlation analysis were used to find out relationship among risk and return. It is
found that the risk premium of equity is essentially the same as commodity, equity returns are negatively
correlated with commodity return and currency return and also found that the equity, commodity, and
currency of derivatives are used for hedging purpose
.Key words: Derivatives, Stock market, Risk & Return.
value is derived from the value of one or more transaction by concluding an adverse transaction
basic variables, called bases (underlying asset, in order to offset the risks. New financial
index, or reference rate), in a contractual manner. instruments such as derivatives have been
The underlying asset can be equity, forex, intensively used to hedge these risks. Derivatives
commodity or any other asset. are kinds of financial instruments whose changes
in market value are depending on changes in
Over the last decade the business underlying variables (asset and/or liabilities).
environment has become more and more global, Common examples of underlying variables are
which has led to an increasing level of interest rates, exchange rates, stock prices, stock-
competition but also enabled entities to gain market indices, or prices of commodities. Besides
access to new customers and additional resource hedging risks, derivatives can be used for trading
markets. With a growing diversity of international (speculative) purposes. Though the primary users
business operations an increase in risks naturally of derivatives are financial institutions such as
comes along, especially with risks related to banks, insurance companies, and investment
financial issues such as fluctuating currencies, managers, the usage of derivatives by non-
commodity prices and interest rates. When financial firms is considerable.
companies face those kinds of risks, a common
way to deal with such issue is the usage of hedge
Sharpe
0.43 0.38 0.26
Correlation (R) ratio
relationship between the stock Market index risk premium of Commodity (5.23) is about equal
Return and the Stock Return in a particular period. to the risk premium of Stocks (5.65), and is more
Average 5.23 5.65 2.22 (0.89) and Stocks (0.93) have about the nearest
average return, but the currency (0.64) have
Standard
12.1 14.85 8.47 medium return yield. The return distribution of
Deviation
Returns 0.3
Commodit
0.2
4.5 y
0.1
4 Stocks
0
3.5
-0.1
3 Currency
Average -0.2
2.5
2 -0.3
1.5 Standard -0.4
Deviation
1 -0.5
0.5
0
Commodity Stocks Currency Findings of the Study
The coefficient of correlation is indicates the The study has revealed the following important
strength and direction of statistical relationship findings.
between commodity, stock, and currency. The risk premium of equity (5.65) is
Comparative Correlation of Commodity,
essentially the same as commodity (5.23)
Stock, and Currency
and double the currency (2.22).
Derivatives are financial contracts whose Gary Gorton and K. Geert Rouwenhorst
(2005) Facts and Fantasies about Commodity
value is derived from some underlying asset. Futures
These assets can include equities and equity
George Allayannis and James P. Weston
indices, bonds, loans, interest rates, exchange (2001) The Use of Foreign Currency Derivatives
rates, commodities. The contracts come in many and Firm Market Value The Review of Financial
Studies Spring 2001 Vol, 14 No.1 PP 243 -276
forms, but the more common ones include
options, forwards/futures and swaps. This study Hina Shahzadi and Muhammad Naveed
Chohan (2010) Impact of Gold Prices on Stock
has been to investor compare among different Exchange: A Case Study of Pakistan
types of derivatives for reducing risk and increase
Jarkko Peltomaki (2010) On derivatives
the return. This is important if one wants to use by equity-specialized hedge funds Journal of
understand the determinants of use of each type of Derivatives & Hedge Funds Vol. 17, 1, 4262
derivatives, due to the fact that investors of Mallikarjunappa.T and Afsal E. M.(2008)
derivatives often use more than one type of The Impact Of Derivatives On Stock Market
Volatility: A Study of The NIFTY INDEX
derivatives. The results shows negatively AAMJAF, Vol. 4, No. 2, 4365, 2008
correlated with equity, commodity, and currency
Dr. G. Malyadri and B. Sudheer Kumar
returns. This study applies to each of the three (2012) A Study on Commodity Market
types of derivatives is not dependent on size, International Journal of Computer Science and
Management Research Vol 1 Issue 5 December
leading us to conclude that the finding of a size 2012