Security Analysis of Selected Stocks at BSE
Syeda Nikhath1, K. Jaswanth2
1Asst Prof, Dept of MBA, Santhiram Engineering College, Nandyal, India.
2Student of MBA, Santhiram Engineering College, Nandyal, India.
ABSTRACT
In today's volatile financial markets, effective risk management has become a crucial component of portfolio optimization and long-term wealth preservation. One of the most significant tools available to investors and financial institutions for this purpose is the use of derivative instruments. This research paper, titled “The Role of Derivatives in Portfolio Hedging and Risk Management”, aims to analyze how derivatives—such as futures, options, forwards, and swaps—are strategically used to mitigate various types of financial risks, including market risk, interest rate risk, currency risk, and commodity price risk.
The study explores the theoretical foundation of derivatives, along with their practical application in portfolio hedging, wherein investors use these instruments to reduce the impact of adverse price movements in underlying assets. It further investigates the concept of hedging effectiveness, delta hedging, and the implications of basis risk in imperfect hedging scenarios. Through case studies, market data, and simulations, the paper illustrates how both institutional and retail investors can incorporate derivatives into diversified portfolios to manage systematic and unsystematic risks.
The research also evaluates the regulatory framework governing derivative markets in India and globally, highlighting the importance of transparency, leverage control, and risk disclosure in derivative trading. While derivatives offer significant advantages in managing portfolio risk, the study also cautions against speculative misuse and the potential for amplified losses due to leverage and improper strategy execution.
The findings of this study reinforce that when used responsibly and with adequate risk assessment, derivatives serve as powerful financial instruments for portfolio insurance, yield enhancement, and strategic asset allocation. This paper thus contributes to a deeper understanding of derivatives as essential tools for modern investment management.
Keywords: Derivatives, Hedging, Portfolio Management, Risk Management, Futures, Options, Swaps, Forwards, Systematic Risk, Basis Risk, Delta Hedging, Leverage, Market Volatility, Derivative Markets, Financial Instruments
