What would access to derivatives do to FII and FDI investment?
Access to derivatives would increase the flow of FII and FDI investment. The two important kinds of risk that foreign investors are exposed to are currency risk and country risk. The first would be manageable using dollar-rupee futures and options, and the second would be manageable using index futures and options. The details of usage would be subject to the individual requirements. For example, some FIIs might choose to completely eliminate their dollar-rupee exposure, coupled with portfolio insurance” to cap their downside exposure at no worse than x%. Other FIIs might choose to use index derivatives as a liquid way to increase their equity exposure. Similarly, investors in India through FDI would be able to use dollar{rupee futures to control their risk of a currency devaluation, and use index futures to proxy for the overall success of India’s economy. These methods of controlling risk are quite routine in the international financial community. (See, for example, the article Inves
