Financial Knowledge In Investment Decision In Nepalese Derivatives Market

Financial sector is the major component of the economy.Innovation has a dominant role in financial sectors these days.Innovative financial instruments are swapping the financial sectors scrupulously and meticulously.Derivatives is a financial contract,the values of which is derived from the corresponding underlying securities like equity prices,interest rates,exchange rates,commodity prices and the probabilities of certain credit events.Derivatives market is the financial market in which financial instruments such as futures,contracts or options,which are derived from other forms of assets,are traded..History of derivatives market is not so long in Nepal.It was started in Nepal since 2005.Future,option,swap and forward derivatives are in practice around the world but in Nepal only future derivatives are traded.Future contracts on precious metal like gold,silver,and crude oil are mostly traded by Nepalese investors.There are a total of fifty two registered commodity exchange and seven commodity exchanges are actively providing the trading platform for derivative investors in Nepal.This study basically deals with the application of financial knowledge in investment decision in Nepalese derivatives market.The study is based on primary sources of data.Stratified and judgmental sampling method is used for selecting the sampling unit.Further,the study focuses on the descriptive and causal research designs by using structured questionnaire to deal with the issues raised as well as the inferential analysis to support the significance of the relationship between different variables.In derivatives market,financial knowledge is the ability of investors to analyze the financial concern related to derivatives market in terms of investment and analysis with the help of technical knowledge,fundamental knowledge,training,experience and intuition.The majority of the investors are not satisfied with the awareness and knowledge in derivatives market.The overall satisfaction level among investors is not encouraging in Nepalese and the level of financial knowledge in derivatives market is insufficient and far from its acceptable limit.This study shows that there is positive correlation between return on investment and each of the five components of financial knowledge i.e.technical knowledge,fundamental knowledge,training,experience and intuition.There is significant relationship between profitability and financial knowledge.Similarly,technical knowledge,fundamental knowledge,training,experience and intuition contribute in profitability of derivatives investors.International politics,international economy,national legal environment,knowledge on derivatives and economic data and reports are the most important factors that affect investment decision in derivatives investors.Advanced information communication technology(ICT),natural calamities and provision of physical delivery are the moderately affecting variables.Similarly,national politics and national economy are the least important factors affecting investment decision in Nepalese derivatives market.The most important factors for selecting a particular commodity for trading Nepalese derivatives market are expected return,past trend,risk appetite,investment horizon,and investment objectives.Moderately important factors are volatility and portfolio.Similarly,least important factors are contract size and price,liquidity and investible surplus.Basically all the investors have speculative purpose behind the derivatives trading which is a risky endeavor.So,investors should have effective risk management strategy.Investors are not satisfied with the trading facilities provided by the exchange.There is a need for advancement in derivatives software that could address the issues of investors.Establishment of regulatory institution of the industry is the prime concern for government.Proper mechanism of transparency and governance in the industry results in maintaining a sustainable pace of development of the industry.Government of Nepal should come up with the concrete plan with an alliance to the stakeholder to institutionalize and professionalize the market and exchange should also support the change initiative walking with the investors that would stop Dabba trading from the market so that investors feel secure to invest in the market.Additionally,Investors should widen their knowledge base of derivatives market which is the crucial factors to determine the profitability of investors.