Growth Drivers of Derivatives

Over the last three decades, the derivatives market has seen a phenomenal growth. A large variety of derivative contracts have been launched at exchanges across the world. Some of the factors driving the growth of financial derivatives are:

1. Increased volatility in asset prices in financial markets
2. Increased integration of national financial markets with the international financial markets
3. Marked improvement in communication facilities and sharp decline in their costs
4. Development of more sophisticated risk management tools, providing a wider choice of risk management strategies
5. Innovations in the derivatives markets, which optimally combined the risks and returns over a large number of financial assets, leading to higher returns, reduced risk and lower transactions costs as compared to individual financial assets.