By AltG Investment Research Lab
There has been a lot of debate around India’s F&O Market of late. That retail investors must be educated and protected is absolutely non-debatable. However, India must continue to expand, deepen and build out the Futures & Options market to build capital markets capable of powering the Indian economy forward.
But, why does the F&O Market matter? For a variety of crucial structural reasons:
Price Discovery & Hedging - Deep and liquid F&O Markets allow for risk management and price discovery. Isn’t this stating the obvious? Not really! People view hedging with a very obtuse angle. The key is not just the actual tool being available to hedge risk but also the perception of “availability”. This “risk perception” is what allows more investor flow, capital formation and global participation. India will drive a significant component of global growth. However, to be able to finance the growth, India needs to tap into global balance sheets of all shapes and sizes. The F&O Market is what allows that to happen through risk transfers and risk management.
New Financial Instruments - A liquid options market allows for deep and liquid markets in financial instruments that help mitigate risk and boost investment. For instance, perhaps there is no country in the world where the need for a massive convertible bond market is as much as India. A lot of good businesses suffer due to poor capital structures. A convertible bond market thrives when the company owners/management disagree with the bond and equity investor on the risk built into the company. This is essentially where convertible bonds solve for the deadlock. Simple debt is too rigid and simple equity is too expensive. But, what do you need for the convertible markets to take off? A liquid options market to allow the risk to price. A liquid and deep options market across not just the NIFTY 50 but all other listed businesses will significantly de-risk the ecosystem and allow capital to move even more freely.
As India rapidly grows and evolves, along with its Total Factor Productivity and Labour Productivity, its Capital Stock will be the 3rd determinant of its economic growth and prosperity. The availability of Capital Stock needs constant innovation and an eye on the future. F&O is crucial to that story.
Disclaimer: In the article "India's F&O Market: Shaping the Future, One Trade at a Time" above - Any views, comments or communication (above or in the past) should not be construed to be investment advice by Alternative Growth (hereafter referred to as “AltG”) in any form whatsoever. AltG does not make an offer to sell or solicit to buy any securities.
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