Effectiveness of Derivatives as a Risk Management Tool for Retail Investors: An Empirical Study

Volume 11, Issue 2, 2026

International Journal of Commerce and Management Studies, ISSN 2456-3684

Paper Title

Author Name and Affiliation

Abhinav Ravindra Sontakke

Research Scholar, PHLR Dept. of Commerce, Nabira Mahavidyalaya, Katol, Emailid: abhinav1sontakke@gmail.com

Abstract

Derivative trading has become a rapidly growing segment of the investment industry, especially for retail investors, who are seeing new investment possibilities because of the opportunities it offers in risk management and portfolio diversification. Traditionally, the use of derivatives has been dominated by institutional investors, who use them to manage market risk; however, the growing involvement by individual investors has led to several interesting questions about their use, financial literacy, and perception of risk. Most of the previous research has concentrated on institutional investors, prices of derivatives and speculative trading, with little research available to address the effectiveness of derivatives as risk management tools for retail investors, especially in emerging markets like India. The present study is aimed at determining the effectiveness of derivatives in minimizing investment risks faced by retail investors and investigating the effect of financial literacy, market awareness, trading experience, technological availability and risk attitude on the use of derivatives by retail investors. This study uses an empirical approach using primary data from 60 respondents who are retail investors who were conveyed through a questionnaire with a Likert scale ranging from 1 to 5. The collected data is analysed using descriptive statistics and regression analysis. The results indicate that the use of derivatives is able to reduce the risk of portfolios if investors have enough financial knowledge and use them properly. Key factors which affect the efficient use of derivative instruments are financial literacy and market awareness. But lack of investor education and speculative trading habits still restrict the gains from derivatives for retail investors. The study builds upon the literature by creating a conceptual framework to explain the relationship between investor characteristics and the effectiveness of derivatives. The results shed light on the design of investor education programmes and on the encouragement of responsible behaviour by retail investors in the derivatives markets, for financial institutions, brokerage firms and regulators.

Keywords

Derivatives, Risk Management, Retail Investors, Hedging, Futures, Options

References

Options, Futures, and Other Derivatives, Hull, J. C. (2022).
Investments, Bodie, Z., Kane, A., & Marcus, A. (2021).
Securities and Exchange Board of India. Investor Survey Report (2024).
Reserve Bank of India. Financial Stability Report (2025).
National Institute of Securities Markets. Investor Education Report (2024).
Financial Derivatives research articles from various peer-reviewed journals.
Barber, B. M., & Odean, T. (2013). The Behavior of Individual Investors. Handbook of the Economics of Finance.
Lusardi, A., & Mitchell, O. S. (2014). The Economic Importance of Financial Literacy. Journal of Economic Literature, 52(1), 5–44.
Chance, D. M., & Brooks, R. (2016). Introduction to Derivatives and Risk Management. Cengage Learning.
Mishkin, F. S. (2021). The Economics of Money, Banking and Financial Markets. Pearson.
Saunders, A., & Cornett, M. M. (2020). Financial Institutions Management. McGraw-Hill.
SEBI. (2024). Investor Awareness Reports.
NSE India. (2024). Derivatives Market Statistics and Annual Reports.

DOI

DOI: 10.67061/ijcams.2026.vol.11.issue.02.4083

Download PDF