A firm faces several types of risks. Its profitability fluctuates due to unanticipated changes in demand, cost, price, taxes, interest rates, exchange rates, etc. Managers may not be able to fully control these risks, but to some extent, can decide the risk that a firm can bear. They adopt many strategies to reduce the risk by keeping several options open, which ultimately creates flexibility that might bail them out in difficulties. One major way of reducing the exposure to risk is by entering into financial derivatives. Risk management is an integral part of the financial service industry; and due to globalization the Indian financial market will see an increase in the products in this category.
The
changing scenario has forged a change in the Indian security market. Also certain
market imperfections operative in the market called for change. A majority of
organizations and individuals face financial risk due to changes in the stock
market, prices, interest rates and exchange rates having great significance on
the financial soundness.
Risk
taking is the core competence of entrepreneurial spirit; without embracing risks
a business can not reap rewards. Risk and return are the two sides of a coin;
while risk taking is known for ages, the emergence of risk management as a specialized
field is a fairly recent phenomenon. Risk management is an integral part of the
financial service industry. Fund managers, merchant bankers, brokers and portfolio
managers, are all exposed to various types of risks. One of the most important
risks is price risk.
Peter
L Bernstein in his celebrated book, Against the GodsThe Remarkable Story of
Risks, advocated that in the dark ages risk is associated with God. As the
mankind progressed, and business and markets grew, the art of risk management
grew from the primitive stages to the modern rocket science. Hence, as the businesses
evolved, market expanded and financial markets matured and grew in complexity,
and the need for instruments to manage risk was felt. It is therefore not surprising
that the financial instruments for management of risk have evolved, which are
referred to as `Financial Derivatives'. |
