In India, generally all capital market investment avenues are perceived to be risky by the investors. But the younger generation investors are willing to invest in capital market instruments and that too very highly in Derivatives segment. Even though the knowledge to the investors in the Derivative segment is not adequate, they tend to take decisions with the help of the brokers or through their friends and were trying to invest in this market. This study was undertaken to find out the awareness level of various capital market instruments and also to find out their risk preference in various segments.
To educate investors who are risk averse for trade in derivatives
Awareness about the various uses of derivatives can help investors to reduce the risk and minimize the losses
“Investment property portfolio management and financial derivatives” by Patrick McAllister, John R. Mansfield. His study on Derivatives has been an expanding and controversial feature of the financial markets since the late 1980s. They are used by a wide range of manufacturers and investors to manage risk. This paper analyses the role and potential of financial derivatives investment property portfolio management. The limitations and problems of direct investment in commercial property are briefly discussed and the main principles and types of derivatives are analysed and explained. The potential of financial derivatives to mitigate many of the problems associated with direct property investment is examined.
“Derivatives, risk and regulation: chaos or confidence?” by R. Dixon, R.K. Bhandari said that there has been an extraordinary increase in the use of financial derivatives in the capital markets. Consequently derivative instruments can have a significant impact on financial institutions, individual investors and even national economies. This relatively recent change in the status of derivatives has led to calls for regulation. Using derivatives to hedge against risk carries in itself a new risk was brought sharply into focus by the collapse of Barings Bank in 1995. The principal concerns of regulators about how legislation may meet those concerns are the subject of current debate between the finance industry and the regulators. Recommendations have been made and reviewed by some of the key players in the capital markets at national and global levels. There is a clear call for international harmonization and its recognition by both traders and regulators. There are calls also for a new international body to be set up to ensure that derivatives, while remaining an effective tool of risk management, carry a minimum risk to investors, institutions and national/global economies. Having reviewed derivatives and how they work, proceeds to examine regulation. Finds that calls for regulation through increased legislation are not universally welcome, whereas the regulators’ main concern is that the stability of international markets could be severely undermined without greater regulation. Considers the expanding role of banks and securities houses in the light of their sharp reactions to increases in interest rates and the effect their presence in the derivatives market may have on market volatility. Includes the reaction of some 30 dealers and users to the recommendations of the G-30 report and looks at some key factors in overcoming potential market volatility.
“Management’s disclosure of hedging activity: An empirical investigation of analysts and investors reactions” by JenniferReynolds-Moehrle. This study aims to examine how market participants changed the way they process earnings information after learning of the implementation of hedging activities. Design/methodology/approach – Using a sample of derivative user and non-user firms, this study empirically compares earnings predictability, forecast revision behavior, and the earnings response coefficients before and after the disclosure of hedging activity.
Findings – The findings indicate that analysts’ forecast accuracy increased and that unexpected earnings were incorporated into subsequent earnings forecasts to a greater extent subsequent to disclosure of sustained hedging activity. Additionally, the findings indicate an increase in the earnings-return relation in the hedging activity period.
To Study the various investment avenues and the investors risk preference towards it.
To find out the general demographic factors of the investors dealing in capital market.
To find out the preference level of investors on various Capital Market instruments.
To find out the type of risk which are considered by the investors
To find out the ways through which the investors minimizes their risk
To find out the preferences of Investors in derivatives market.
A Research design is purely and simply the framework of plan for a study that guides the collection and analysis of data. The study is intended to find the investors preference towards cash market and derivatives. The study design is descriptive in nature.
Descriptive study is a fact-finding investigation with adequate interpretation. It is the simplest type of research and is more specific. Mainly designed to gather descriptive information and provides information for formulating more sophisticated studies.
Selection of study area: The study area is in Chennai.
Selection of the sample size: 100
Convenience method of sampling is used to collect the data from the respondents. Researchers or field workers have the freedom to choose whomever they find, thus the name “convenience”. About 100 samples were collected from Chennai city and most of the respondents were customers coming in to stock broker’s office and certain addresses were collected from reputed brokers.
Primary data – collected through Structured Questionnaire.
Secondary data – Earlier records from journals, magazines and other sources.
Multiple Response Table
Understanding the nature of the risk is not adequate unless the investor or analyst is capable of expressing it in some quantitative terms. Expressing the risk of a stock in quantitative terms makes it comparable with other stocks.
Measurement cannot be assured of cent percent accuracy because risk is caused by numerous factors such as social, political, economic and managerial efficiency.
Time was a limiting factor.
Only those investors who deal in capital markets are considered.
Respondent’s bias was another limiting factor.
Most of the respondents (44%) are of the age group 31-40.
Majority of the respondents (65%) are male.
Most of the respondents (38%) are graduates followed by Post graduates.
Most of the respondents (29%) are entrepreneurs and Working Executives.
Most of the respondents (38%) are having an Income level of 1- 5alcs followed by respondents having income level 5-10 lacs.
Most of the respondents (40%) are influenced by friends and relatives followed by brokers.
Most of them (29%) are highly favourable towards the cash market.
Most of them (30%) are highly favourable towards the Futures market.
Most of them (26%) are favourable towards the Options market.
Most of them (30%) stayed neutral towards the Commodities market.
Majority of the respondents (37%) wanted to invest in short term funds followed by both short term and long term funds.
Majority of the respondents (36%) preferred wealth maximization instruments followed by steady growth instruments.
Most of them (43%) invested about 5-10% of their income on investments and only 9% invested more than 20% of their income on investments.
Respondents perceived that Market Risk and Credit risk are the two major risk observed in capital markets.
Most of the respondents (82%) wanted to minimize their risk involved in the capital market.
Most of the respondents (49%) said that News Papers and Financial Experts help them to minimize their risk.
Most of the respondents (63%) said that high Margin charged was their main barrier while dealing in Derivatives market.
Most of the respondents (38%) feel that the margin amount charged in derivatives market should be in between 5000-10000 and if it is less than 5000, they are very much happy..
From Correlation test , it is found there exist a negative correlation between the income percentage on investment and the participation in derivative market
From One Way ANOVA it is found that there is significant difference between the annual income and the income percentage towards investment.
From the Multiple Response test, it is found that the investors who invest around 5-10% of their investment mostly considers the market risk(18%) as the major risk which prevails in the market.
From the Multiple Response test, it is found that the investors whose investment is around 10% of their income, consider that the affordable margin amount for investment in Derivatives is up to Rs10000/-.
In the current scenario, investing in stock markets is a major challenge ever for professionals. Derivatives acts as a major tool for reducing the risk involved in investing in stock markets for getting the best results out of it. The investors should be aware of the various hedging and speculation strategies, which can be used for reducing their risk. Awareness about the various uses of derivatives can help investors to reduce risk and increase profits. Though the stock market is subjected to high risk, by using derivatives the loss can be minimized to an extent.
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