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International Journal of Economics Business and Human Behaviour Review Article Finance 2021 Volume 2 Number 2 April-June Publisher E-ISSN:2693-1478 International Journal of Economics Business and Human Behaviour Review Article Finance 2021 Volume 2 Number 2 April-June www.openvectors.com Real Estate Futures and Derivative Markets in India: Scope and Challenges Gupta A.1*, Verma S.2, Pratap Singh Negi D.3, Sirohi R.4 DOI: 10.5281/zenodo.5035156 1* A tul Gupta, A s s is tant P rofes s or, C ommerc e, H indu c ollege Delhi U nivers ity, Delhi, Delhi, I ndia. 2 Sabhya V erma, Student, C ommerc e, H indu c ollege Delhi U nivers ity, Delhi, Delhi, I ndia. 3 Dhananjai P ratap Singh N egi, Student, C ommerc e, H indu c ollege Delhi U nivers ity, Delhi, Delhi, I ndia. 4 Ranvir Singh Sirohi, Student, C ommerc e, H indu c ollege Delhi U nivers ity, Delhi, Delhi, I ndia. In this paper, we try to explain how Real Estate Futures and the Derivatives market would be important for our Indian Economy. We aim to come up with the scope of Real Estate Futures and Derivative Markets in India and also take into consideration the challenges that this would face in the Indian Markets. To come up with these things we conducted a literature review, in which we went through Research Papers written before the commencement of this market regarding the basics of Real Estate futures and derivatives market in other countries as well as papers that were written after the market was implemented. The Real Estate Futures and Derivatives market will also provide liquidity to investors who want to diversify their portfolio and even to those who want to hedge their losses. Liquidity being an important factor in any futures and derivatives market, it is important to have investors who possess the right information and knowledge as to how the market functions. The Indian Real Estate Market was examined and the advantages of Real Estate Futures and Derivatives markets outweigh the challenges. Keywords: Hedging, Bid-Ask Spread, Ring-Fencing, Collateral Debt Obligation (CDO’s), Securitization, Residential Mortgage-backed securities (RMBS), Subprime, Spot market, Total Return Swap, Negative amortization, Interest rate risk, SVR Corresponding Author How to Cite this Article To Browse A tul Gupta, A s s is tant P rofes s or, C ommerc e, A tul Gupta, Sabhya V erma, Dhananjai P ratap H indu c ollege Delhi U nivers ity, Delhi, Delhi, Singh N egi, Ranvir Singh Sirohi, Real E s tate I ndia. Futures and Derivative M arkets in I ndia: Sc ope E mail: and C hallenges . I JE BH B. 2 0 2 1 ;2 (2 ):1 1 -2 1 . A vailable From https ://ijebhb.c om/index.php/ijebhb/artic le/view /3 4 Manuscript Received Review Round 1 Review Round 2 Review Round 3 Accepted 2021-02-09 2021-02-11 2021-04-14 2021-05-29 2021-06-01 Conflict of Interest Funding Ethical Approval Plagiarism X-checker Note No No Yes NIL © 2021by Atul Gupta, Sabhya Verma, Dhananjai Pratap Singh Negi, Ranvir Singh Sirohiand Published by Open Vectors. This is an Open Access article licensed under a Creative Commons Attribution 4.0 International License https://creativecommons.org/licenses/by/4.0/ unported [CC BY 4.0]. International Journal of Economics Business and Human Behaviour 2021;2(2) 11 Futures and Derivative Markets and Atul et al Introduction Through this research paper, we are trying to give India is one of the largest and fastest-growing the readers a glimpse into what a world with an economies of the world with retail and efficient real estate derivative market may look institutional investors diversifying their income like. into diverse asset classes, the most indispensable of them being real estate, which has still not been efficiently capitalized and exploited. People Research Objective typically invest in real estate over other financial Real Estate is a capital-intensive market with securities due to its tangible nature and its limited hedging capabilities. Separate markets inherent ability to be pragmatically utilized. for each of the major geographic regions and According to the AIDIS report published in 2014, each of the major kinds of real estate, real estate as an asset class accounts for 72.6% enabling hedging of risks. Real estate and 47% of the total asset category of both rural accounts for a majority of national wealth, yet and urban households respectively. This exhibits futures and options markets are nowhere. that an average individual is heavily invested in real estate and that real estate makes up a huge Investors cannot invest in a largely diversified chunk of an individual's wealth. However, such Real Estate portfolio without incurring gigantic exposure to real estate is not exclusive to enormous transaction costs. The short side India, developed nations like the USA, England, should be taken by owners of region-specific and Germany have huge exposure in real estate Real Estate, this would help them hedge their too. Investing in real estate comes with its fair position as real estate owners. share of problems which if not dealt with can lead Having futures and derivative markets would to irreparable and irreversible financial impact. also reduce the transaction cost. The current Real Estate market comprises unaware Firstly, investing in real estate requires huge investors which leads to higher bid-ask capital which an average individual simply does spreads. not afford, thereby pushing these individuals to take mortgages and exercise other credit facilities. Holders of residential mortgages and Secondly, purchasing property, houses, barren, mortgage insurers may find hedging in this agricultural land requires hefty transaction costs market very reassuring. Till equity in a which tend to pinch and deter investors. Thirdly, property is more than the unpaid balance of real estate is an illiquid asset making it effectively mortgage and transaction cost, insurers and impossible for an investor to sell it off during a holders don’t suffer losses. Increase risk when downturn thereby adversely affecting the Real Estate markets decline and defaults individual's financial status. increase. Hedging would provide insurance against these large risks. According to the fundamental portfolio theory, an investor should hold diverse financial securities in Different times and places of booms and busts his/her portfolio to minimize his/her risk. Although make us realize that a single national futures diversifying makes sense it is nearly impossible to contract is not feasible. Real Estate prices are achieve without encapsulating real estate in your less volatile, suggesting day-to-day movement portfolio since real estate as an asset accounts would not be large. We expect to see that for such a substantial chunk of the total assets prices of futures and options tend to show across the world, especially in India. Establishing day-to-day fluctuations based on news. It is and implementation of a derivative market for real likely that these markets would make the cash estate will help in alleviating all these inherent market more efficient. problems and benefit both individual and retail investors respectively which in turn will make the Research Methodology financial markets more efficient and create The main purpose of this paper is to highlight the benefits for society as a whole. salient features and importance of a Future and 12 International Journal of Economics Business and Human Behaviour 2021;2(2) Futures and Derivative Markets and Atul et al Option (Derivative) market for the Indian Real Equity insurance, mortgage insurance, and default Estate sector, with its primary object to help risk by providing hedging facilities. It also homeowners to hedge their risks in particular. As discusses how this market will lower down the suggested many other researcher, the study is rate of volatility in real estate prices and resolve mainly based on secondary data sources which rent-related problems. They have very well comprise data from websites, articles, and studies discussed the different horizons, advantages, of various published papers(Albashabsheh, doubts about the viability of the market, and how Alhroob, Irbihat, & Javed, 2018; Alhroob, Irbihat, It will soothe down the business cycle, also Albashabsheh, & Javed, 2017; Husain & Javed, discussing how it will bring about changes within 2019a, 2019b; Javed, 2017, 2018; Javed, the lives of current or prospective homeowners, Aldalaien, Husain, & Khan, 2019; Javed, Atallah, Individual or institutional investors, renters, Aldalaien, & Husain, 2019; Javed & Azhar, 2017; builders, farmers. Javed, Husain, & Ali, 2020; Javed & Khan, 2017; A. A. Khan & Javed, 2017; A. Khan, Baseer, & Javed, Robert J. Shiller (April 2008) in his paper on 2017; Rutskiy et al., 2020) . Mainly the study was Derivatives markets for home prices explains the inspired by Robert J Shiller’s published papers risk management tools used to home prices. He which helped in establishing the market in the US. talks about how the establishment of an index- A small sample survey was also conducted by based market has led to the arousal of various personal interactions and using Facebook to help inefficiencies and setbacks in the Home price index understand the awareness of hedging tools that construction method and psychological barriers are available to homeowners in the country. are explained. The post period of establishment of a Real estate derivatives market is described in Literature Review this paper, it talks about the setbacks faced in the industry and Shiller also explains the reasons Robert J Shiller, Alan N. Weiss, and Karl E. Case in behind the slow growth rate in the derivative December 1991 drafted one of the initial studies market for real estate. He discusses the regret made on the topic of Real Estate derivatives. Their theory and Hedging demand theory approach to primary goal was to create an index-based find out the obstacles in hedging real estate futures and options market in the real estate prices.
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