Derivatives in Risk Management A Comparative Study of Selected Indian and Foreign Banks

Abstract

Introduction: newlineRisk management has always been the subject of great importance and has attracted lot of research and studies in the past. Risk in this fast moving financial world, is very dynamic and is constantly evolving. Progressive deregulation, globalization and increasing cross border dealings, are making the banking environment not only competitive but also uncertain and risky. Banks have realized that it is important to evolve sound risk management practices and policies in order to safeguard them from various risks that can cause unexpected losses and decline in the value and return on their assets. To compete, banks are introducing wide range of new products and are expanding their product base by moving fast on product innovation. This is changing the inherent risks and its management at a much faster speed. The recent chaos in the financial world and its global repercussions due to the failure in observing the sound risk management practices has made risk management a hot topic in today s financial world. newlineOver the past three decades several kinds of for risk management techniques have emerged. These techniques have revolutionized the financial services industry and have created gigantic markets for the transfer specific kinds of risk and generating huge amount of profits. These strategies have not only freed up huge amount of capital enabling industries to grow much faster but also help them to create more value than their competitors. Derivatives are often used in the form of such strategies to fulfil this objective. Today more and more companies are using derivatives to manage the market risks by transferring them to the intermediary market players like banks. newline newline