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risk management Stock exchanges follow robust risk management measures for derivative trading.
These include, initial base minimum capital requirements, real time and
system based monitoring of positions and automatic deactivation of trading
terminals in case of exceeding the limits as imposed by exchanges, margins
and daily mark to market margin system and initial Value at risk (VAR) based
margin system. Apart from that there are various position limits, broker
wise limits and scrip wise limits are also there to avoid building up of
huge positions.
Who monitors derivative trading in securities market? Derivative trading in India is very well monitored by the stock exchanges (NSE has a pre dominant position as far as derivative trading is concerned compared to BSE). Besides SEBI also monitors the derivative markets through appropriate policy measures and frequent inspections. What are the advantages of trading in derivatives? Derivative contracts are effective tool for hedging and thereby reducing the potential of future risk. They also allow investors to take a leveraged position in the market and thereby increase the possibilities of earning higher returns. Derivative trading is the logical extension of cash market trading and a healthy derivative market is a sign of effective and robust economy.
What are the disadvantages of trading in derivatives? Because of their ability to provide leveraging, derivative disasters are pretty common in international markets. Just as there is huge potential of earning higher returns, it also exposes individuals and corporations alike to lose money in case the market moves against the positions held by them. Too much leverage has been the cause of worry and pitfalls for many traders and investors alike. |
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