REVIEW OF LITERATURE

W. Sias and Whidbee (2010) attempted to examines the relation between insider (officers
and directors) transactions and trading between institutional and individual investors to better
understand what motivates insiders to trade, the role of institutional investors in providing
liquidity to insiders, and how insiders perception of mispricing is related to net demand by
individual investors versus institutional investors. Researchers found that is a strong inverse
relation between insider trading and institutional demand the same quarter and over the
previous year and suggested a combination of factors contribute to this relation. First,
institutional investors are more likely to provide the liquidity necessary for insiders to trade.
Second, insiders are more likely to buy low valuation and low lag return stocks while
institutions are attracted to the opposite security characteristics. At the end the researchers
concluded that insider trading is inversely related to demand by institutional investors (and
positively related to demand by individual investors) in the same quarter and over the
previous year. Institutional investors providing liquidity to insiders and institutions and
insiders attraction to opposite security characteristics account for most of these relations.
Dhingra (2004) Believes if one views that past stock exchanges and the effect of blue chip
companies like IBM, Coca- Cola, Microsoft or Intel on the stock index, there is clear sign to
the rise of stocks to substantial amounts. History shows the phenomenal growth characteristic
of the above stocks is related to that of the fundamentals on which the companies have been
operating under and not related to speculators. The current market capitalization of Microsoft
Corporation is approximately $225 billion compared to the group turnover of mere $22
million, and looking back at the BP case study (1998), the answer indicates the advantage
derivatives provide against various risk involving commodities, fixed assets or interest rate
transaction and planning.
Edwards (2000) critically evaluates Asian Options are different and are average rate
options. At the end of the contract period, the strike rate is compared with the average rate
observed for the currency exchange. If the strike price is favorable to the holder of the Asian
Options, the option is exercised by the way of cash settlement. Asian options are useful for
hedging currency exposure where management accounts are translated on an average rate for
the accounting period and are misleading cheaper that American or European options. They
simply cost less because of the statistical fact that an average of a price series is more stable
than any particular price series. Asian options are cash settled automatically.
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Edward (2000) argues that Currency Swaps involve exchange of currencies at specified
exchage rates and to make a series of interest payments for the currency that is received at
specified intervals. Today, interest rate swaps account for majority of banks swap activity
and the fixed for floating rate swap is the most common interest rate swap. In such a swap
one party agrees to make a floating rate interest payment in return for fixed rate interest
payments from the counterparty, with the interest rate calculations based on hypothetical
amouny of principal called the notional amount.
Marlowe (2000) opines that the emergence of the derivative market products most notably
forwards, futures and options can be traced back to the willingness of risk-averse economic
agents to guard themselves against uncertainties arising out of fluctuations in asset prices.
Financial markets, by the very nature can be subject to a very high degree of volatility.
Through the use of the products of derivatives it is possible to fully or partially transfer risk
of price by looking-in the price of assets. As instruments of risk management, derivative
products generally do not influence the fluctuations in the underlying asset prices. However
by locking in the price of assets, the products of derivatives minimize the impact of
fluctuation in the price of assets on the profitability and cash flow situation of risk-averse
investor.
Shah (2000) opines equity derivatives trading started in India in June 2000, after a regulatory
process which stretched over more than four years. In July 2001, the equity spot market move
to rolling settlement. Thus, in 2000 and 2001 the Indian Equity market reached the logical
conclusion of the reform program, which began in 1994. It is, hence, important to learn about
the behaviour of the equity market in this new regime.
Industry Week (July 1998) mentions that derivatives have been plagued, which have led to
medias criticism and subsequent users and accounting boards cautious attitude towards
derivatives. In the past most derivatives problems are related to the uncontrolled speculation
by various individuals primarily in the highly susceptible futures, forwards and swaps.

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