Impact of financial derivatives in Indian markets: A case of Black Scholes Merton Model Harvard Case Solution & Analysis

Impact of financial derivatives in Indian markets: A case of Black Scholes Merton Model Case Solution


Derivatives are the most important sector in any economy due to its advantage of reducing the level of risks under the future purchase of options. Which allows to fix the price level in order to maintain the same amount in future. In the case, the importance of Indian securities markets has been identified. Therefore, the increased financial risks of the market have led to improvement in the proper valuation of Black Scholes Merton model.

The main reason to analyse through selected models will be to understand the relative easy price fluctuations and to consider a good theoretical value of estimations. The key advantage to use the model will be to assess the market price 3 that is higher, but under the agreed price of option value.

It is also useful to implement within a selected market because traders will be interested in buying expected returns instead of going for the current price value. The second thing to consider is the price that they will pay for the fixed options and hedge in the derivative markets. The risk factor is quite high under the scenario, but it will probably be good for future perspectives.

Rise of derivatives

After World War I, the financial systems changed its process to maintain the price and currency estimates for the future. This increased the concept of derivatives market where the prices were fixed for the periods mentioned in the agreement of derivatives. The advantage of fixing the amount was to secure from future inflation rate that could devalue the currency level.

The particular system started its operations in the early 1970’s and is still doing the same thing in order to achieve positive results. Price fluctuations were the main concern for businesses because these would analyse the potential threat of loss under huge market fluctuation.

However, sudden process of financial markets has a great importance over emerging markets like India. With the practice of derivatives, India has increased the level of hedgers and speculators, whose main purpose is to reduce the level of risk by analysing profits margins from fluctuated results.

 Due to certain levels of market demand, the economy has resorted to take sudden changes in order to maintain its financial position in the global market. The whole market is trading through the use of exchange traded and over the counter instruments where  stocks of Bombay stock exchange and National stock exchange are traded.

During early 2000, it was determined that the increasing level of derivatives had made sudden changes in Indian markets due to country’s poor currency level as well the low prices of commodities. Whereas, the equity markets have been successful since the emergence of derivatives. The main reason to study the Indian markets was high volatility of prices, which increased the level of derivative activities in the country.

Use of derivatives in India

There are many financial institutions, which are practising derivative instruments within a market, thus they are willing to use derivative instruments of interest rates and currencies in order to manage their level of risk for the future inflation impact within the economy.

In India, there are still many practices involved within the market of financial instruments, they are using the process through exchange-traded derivative markets and contributed to the NSE trades over the period of demand.

The increasing levels of these practices have improved the market performance through huge sell and buy agreements for future in order to reduce the risk factors of inflation. Therefore, from the current situation, it has been analysed that the Indian market has gone through huge awareness and importance of the derivative instruments to maintain the level of economics per capita under control............

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