1. Prices in an organized derivatives market reflect the perception of market
participants about the future and lead the prices of underlying to the perceived future level. The prices of derivatives converge with the pric es of
the underlying at the expiration of the derivative contract. Thus derivatives
help in discovery of future as well as current prices.

2. The derivatives market helps to transfer risks from those who have them
but may not like them to those who have an appetite for them.

3. Derivatives, due to their inherent nature, are linked to the underlying cash markets. With the introduction of derivatives, the underlying market
witnesses higher trading volumes because of participation by more players
who would not otherwise participate for lack of an arrangement to transfer
risk.

4. Speculative trades shift to a more controlled environment of derivatives
market. In the absence of an organized derivatives market, speculators
trade in the underlying cash markets. Margining, monitoring and surveillance of the activities of various participants become extremely difficult in these kind of mixed markets.

5. An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. The derivatives have a
history of attracting many bright, creative, well-educated people with an
entrepreneurial attitude. They often energize others to create new
businesses, new products and new employment opportunities, the benefit
of which are immense.