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This implies that Indian companies are more interested in customised derivative contracts (OTC) in comparison to
readymade derivative contracts. This is because forward contracts are cheap and can be appropriately customised
as per the needs vis-à-vis the exchange traded derivatives, though there is a default risk in OTC contracts but it
is not so detrimental to the interest of the parties because of robust Indian regulatory framework and sufficient
understanding between the parties to honour the contract.
What are the issues or concerns about which companies are apprehensive of using financial derivatives?
With this question, we want to ask about the companies’ perception about the demotivational factors for using
derivatives. The various potential factors which we have chosen are on the basis of survey of prior literatures.
Table-7
Possible Concerns of Hedging
Possible Concerns High Moderate Low
Credit risk 0 0 8
Uncertainty about qualifying for hedge accounting treatment 6 3 5
Tax or legal issues 5 1 6
Disclosure requirements 0 0 4
Cost of hedging compared to benefits 19 25 3
Liquidity risk 0 0 12
Lack of knowledge about derivatives within firm 16 20 2
Difficulty quantifying the firm’s underlying exposures 6 6 9
Perceptions by investors, regulators and the public 10 12 4
Pricing and valuing derivatives 4 2 8
Monitoring and evaluating hedge results 2 0 5
Evaluating the risk of proposed derivatives transactions 1 0 3
Responses to this question for small sized companies because or bankruptcies of Barings Bank
clearly identify that there are they cannot afford to appoint in 1995, Long-term Capital
certain important concerns experts having requisite knowledge Management in 1998, Enron in
which demotivates to go for in the field of derivatives. Because, if 2001, Lehman Brothers, American
using derivatives. Out of so many these instruments are not properly International Group (AIG) in 2008
factors we have included in the handled it may create reasons for and J.P Morgan in 2012. Warren
questionnaire on the basis of our mass destruction of the company Buffet even viewed derivatives as
literature review, we found that cost as we have witnessed in case of time bombs for the economic system
of hedging is the most important Lehman Brothers, J.P Morgan, and called them financial weapons
concern for the companies to Baring Bank, etc. of mass destruction (Berkshire
use derivatives. This implies that Due to certain mishandling of Hathaway Inc., 2002). Norvald
when companies are making a derivatives, which created havoc Instefjord (2005) made a study
cost benefit analysis, the cost of for companies become a perpetual on – Risk and hedging: Do credit
hedging is more than the potential concern for companies which derivatives increase bank risk? His
benefit that is going to accrue to are thinking to use derivatives. analysis identifies two effects of
the company. This is applicable for Derivatives have been associated credit derivatives innovation – they
small companies whose exposures with a number of high-profile enhance risk sharing as suggested
are not so substantial. corporate events that roiled the by the hedging argument – but they
Lack of knowledge about global financial markets over also make further acquisition of
derivatives within the companies is the past two decades. To some risk more attractive. Similarly, some
the next important for concern for critics, derivatives have played an may perceive that derivatives can be
companies. This is also applicable important role in the near collapses very complex, as evidenced by the

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