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  • Chapter 7 – Summary, Findings and Conclusion

    335

    Chapter Seven

    Summary, Findings and Conclusion

    Introduction

    Summary

    Major Findings

    Recommendations

    Conclusion

  • Chapter 7 – Summary, Findings and Conclusion

    336

    INTRODUCTION

    Globalization and liberalization have increased the international trade and financial

    transactions manifold in the recent years. It has, in turn, raised all types of risks including

    market risk, liquidity risk, price risk and interest rate risk. Managing these risks has

    become a major task for finance managers worldwide and it spurred financial innovations

    to mitigate risks. This has led to the emergence of a class of innovative financial

    instruments called „derivatives‟.

    Financial derivative is a widely discussed topic in the recent years due to its

    tremendous growth in terms of volume of trade, number of contracts traded and variety of

    products. However the complex nature of the product, uncertainties involved in trading and

    lack of knowledge about trading techniques are some of the critical issues to be solved.

    Moreover house mortgage issue in U.S, fall of Lehman brothers, US recession which in

    turn led to global recession, has all created a negative image to financial derivatives.

    Skillful use of derivatives is essential to mitigate the loss suffered from spot market.

    Hence it is necessary for anyone who handles derivatives to know the art of dealing with

    derivatives in an efficient way. The process of reducing loss by efficient use of derivatives

    assumes importance and is known as hedging.

    This chapter provides a summary of the study and gives some recommendations

    based on research findings. This chapter is subdivided into three main sections:

    A) Summary

    B) Major findings of the study

    C) Recommendations.

  • Chapter 7 – Summary, Findings and Conclusion

    337

    A) SUMMARY

    This study is an earnest attempt to understand some aspects of financial

    derivatives as a hedge tool. Though financial derivatives were introduced as a hedge tool, it

    is still not widely used. In spite of the measures taken by the regulatory authorities in our

    country to control the volume of speculative transactions, derivatives segment remains

    mostly a domain of speculators.

    Statement of the Research Problem

    Existing research literatures do not conclusively present the extent of hedge usage

    among individual derivative traders and how far they help in mitigating the risk. Present

    study is an earnest attempt to cover this research gap. Following research questions bring

    the problem into sharp focus:

    • Does Indian derivatives market exhibit hedge effectiveness? If so, to what extent?

    • What is the extent of use of derivatives for hedging by traders?

    • Is there any room for promoting hedge habits among individual traders?

    Objectives

    1. To assess the extent of hedge effectiveness of financial derivatives traded in India.

    2. To examine the attitude of individual derivative traders towards hedge.

    3. To compare the general profile, awareness level and trading beliefs of hedgers and

    non-hedgers

    4. To identify and evaluate the perceived problems of derivative traders.

    5. To analyse the nature of influence of various intermediaries on trading decisions of

    individual traders.

    6. To make recommendations to improve the functioning of financial derivatives

    market, if needed.

  • Chapter 7 – Summary, Findings and Conclusion

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    Scope and Significance of the Study

    Scope of the study is limited to some selected stock and index futures. The study is

    confined to the use of derivatives by individual share traders in Kerala. Though derivatives

    were introduced as a risk management tool its usage for hedge purpose by individual

    traders seems to be lacking. Speculative activities are gaining popularity in the derivative

    segment. Hence it is necessary to assess the usage level of derivatives for hedging among

    individual traders. This study covers mainly three different aspects 1) extent of hedge

    effectiveness 2) need for promoting derivatives as a hedge tool and 3) how to fill the gap if

    any, between the hedge effectiveness and the present level of adoption of derivatives to

    hedge.

    Models Developed for the Study

    1. Conceptual model for the study.

    2. Working model.

    3. Model showing present scenario of Indian derivative market.

    4. Financial derivatives as a hedge tool – An acceptance model

    Variables for the study

    Based on the conceptual model developed for the study, relevant variables were

    identified such as coverage of potential loss, satisfaction level, hedge attitude, future

    behaviour, awareness, probable loss, risk level, percentage of risk coverage, stock prices,

    duration of contracts, variety of contracts and frequency of awareness programs.

  • Chapter 7 – Summary, Findings and Conclusion

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    Hypotheses

    As part of the study, 11 hypotheses were developed and tested using appropriate

    tools. A summary of the results of hypothesis testing is given below:

    Table 7.1: Summary of Hypothesis Testing

    Null Hypothesis Test of

    Hypothesis

    Result

    (95% Confidence Level)

    There is no significant

    difference in the awareness

    level of hedgers and non-

    hedgers regarding different

    aspects of derivatives trading.

    T test p value is less than .05 and null

    hypothesis is rejected.

    There is no significant

    difference in the composition of

    hedgers and non-hedgers in

    different regions of Kerala.

    Chi-Square Test p value is greater than .05 and

    hence accept null hypothesis

    There is no significant

    difference in the demographic

    pattern of hedgers and

    non-hedgers

    Chi-Square Test p value is greater than .05 and

    hence accept null hypothesis

    There is no significant

    difference in the distribution of

    ranks given by respondents to

    different problems in

    derivatives trading.

    Chi-Square Test p value is less than .05 and hence

    reject null hypothesis

    Frequency of hedge is

    independent of satisfaction on

    hedge coverage.

    Chi-Square Test p is less than .05. Hence null

    hypothesis is rejected

  • Chapter 7 – Summary, Findings and Conclusion

    340

    Future behaviour of hedgers is

    independent of satisfaction on

    hedge coverage

    Chi-Square Test Out of four aspects identified for

    future behavior, in case of one

    aspect „Future use of hedge‟ p

    value is less than .05. Hence reject

    null hypothesis. But in case of

    other three aspects „Recommend

    hedge‟, „Would continue to trade‟,

    „Welcome new products‟, p value

    is greater than .05 and hence null

    hypothesis is accepted.

    There is no significant

    difference in the assistance

    obtained by hedgers and non-

    hedgers from stock broking

    firms.

    T test p value is less than .05 in case of

    „Advice to hedge‟ hence null

    hypothesis is rejected and in other

    two cases, „Number of awareness

    programs‟ and „Proper training on

    how to hedge‟ p value is greater

    than .05 and hence accept null

    hypothesis.

    There is no significant

    difference in the distribution of

    ranks given by hedgers for the

    most influencing intermediaries

    Chi-Square Test p value is less than .05 and hence

    reject null hypothesis

    There is no significant

    difference in the distribution of

    ranks given by non-hedgers for

    the most influencing

    intermediaries

    Chi-Square Test p value is less than .05 and hence

    reject null hypothesis

    Futures and spot series are

    non-stationary

    Unit Root -

    Dickey Fuller

    Test

    p value is less than .05 for first

    difference series and hence reject

    null hypothesis. Thus futures and

  • Chapter 7 – Summary, Findings and Conclusion

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    spot series are stationary at first

    difference.

    Futures and spot series are not

    cointegrated

    Engle-Granger

    test of

    Cointegration

    p value is less than .05 and hence

    reject null hypothesis. Thus futures

    and spot series are cointegrated.

    Research Design

    The study used descriptive research design. Hedge effectiveness was verified with

    relevant data and tools. It also involves analyzing the risk perception, risk assumption and

    risk mitigation with risk management tools by individual traders.

    Sample design for primary data

    The respondents for the study were investors/traders of financial derivatives market

    with special reference to Kerala. From among the defined population of 65