Factors and Determinants of Derivatives Use – An Indian Perspective

Abstract

Usage of derivatives have steadily and gradually increased in India by their wide adoption across corporate entities. However, there exist sharp contrast among various segments and sectors. Key factors that are enablers and deterrents of selection and application of such instruments by the business organizations have been assessed in the present paper. Essentially a handful of research publications are used as secondary resources to deal with the topic. Besides some common paper, research works across non-financial segment, IT sector and multiple sectors have been duly reviewed. It is found that usage of derivatives have some critical features in Indian context as against the developed economies. Generally the common risk factors associated with business organization force them to adopt a risk management policy framework, whereas decisions reading derivatives are linked with firms capacity, level of perception, financial performance level usually measured by key ratios, international transactions and currency rate fluctuations, market linked factors ad interest rate, volatility in earnings & cash flows are transaction costs identified to be the primary concerns. Tax burden and policy level issues and regulation are also found to be critical in specific cases. Many such factors are having varied impact across sectors and industries.