How big is the derivatives market?


The derivatives market, in a word, huge – often estimated at more that 1.2 $quadrillion on the high end. How can this be? Largely because there are many derivatives that is available in almost all possible kinds of investment assets including stocks, commodities, bonds and foreign exchange.Some analysts even put the size of the market more than 10 times that of the total world gross domestic product (GDP).

However, other researchers dispute these estimates , arguing that the size of the derivatives market is much too high.

Find out the Range of estimates

Determine the actual size of the derivatives market depends on what a person considers part of the market, and therefore, what numbers go into the calculation. Larger estimates come from the sum of the nominal value of all existing derivatives contracts. But some analysts argue that this calculation does not reflect the reality of the nominal value of the underlying assets of derivatives contracts, financial instruments, derivatives linked to, does not accurately reflect the actual market value of derivative contracts based on those assets. (Quick reminder: they derived only to contracts between parties; they themselves are speculation, bought or sold as betting on the future movement of the price of any securities they are based – hence the name ‘derivative.’ So the prices of derivatives depend on the prices of their underlying assets.)

An example that illustrates the difference between the nominal value and the actual market value can be found in widely traded derivatives, interest rate swaps. Great basic dimensions underlying interest rate instruments, although, as a rule, included in the calculation of the total value of swaps, never trade hands. The only money that actually traded in the interest rate swap is significantly less than the amount of the interest payment amounts represent only the portion of the principal amount.

According to the latest Bank for international settlements (BIS), the total amount of fictitious debt contracts on the futures market is 542.4 trillion dollars. But the gross market value of all contracts is much smaller: about 12.7 trillion dollars.

Bottom Line

When the real market value of derivative financial instruments (and not the nominal value) is the trick to estimate the Size of the derivatives market is changing dramatically. However, by all accounts, the derivatives market is quite extensive and significant in the overall picture of investment.

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