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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

338

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

339

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

341

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