How Big Is the Derivatives Market? The visible or measurable size of the derivative market, if you include options, futures, swaps, forex spreads etc, is more than $300 trillion. But there is an invisible or not easy to measure component, which is probably 3 times larger than 300 trillion. So those 2 added together, the size of the derivative markets is approaching $1200 trillion or 1.2 quadrillion . The total size of the world economy itself is less than $73 trillion. In other words, the derivatives market is more than 10 times larger than the size of the world economy. The derivatives market is, in a word, gigantic . So how can that be ? Well largely because there are numerous derivatives in existence, available on virtually every possible type of investment asset, including equities, commodities, bonds and foreign currency exchange. Some market analysts even place the size of the market at more than 10 times that of the total world gross domestic product GDP. However, other researchers challenge these estimates, arguing of the size of the derivatives market is vastly overstated. Figuring the Range of Estimates Determining the actual size of the derivatives market depends on what a person considers part of the market, and therefore, what figures go into the calculation. The larger estimates come from adding up the notional value of all available derivatives contracts. But some analysts argue that such a calculation doesn't reflect reality – that the notional value of a derivative contract's underlying assets, the financial instruments the derivative is pegged to, does not accurately represent the actual market value of derivative contracts based on those assets. A quick refresher: Derivatives themselves merely contracts between parties; they are speculations, bought or sold as bets on the future price moves of whatever securities they're based on – hence the name 'derivative.' So derivatives' prices are dependent on the prices of their underlying assets. An example that illustrates the vast difference between notional value and actual market value can be found in a popularly traded derivative, interest rate swaps. The large principal amounts of the underlying interest rate instruments, although usually included in the calculation of total swaps value, never actually trade hands. The only money traded in an interest rate swap is the vastly smaller interest payment amounts – sums that are only a fraction of the principal amount. According to the most recent data from the Bank for International Settlements (BIS), the total notional amounts outstanding for contracts in the derivatives market is an estimated $542.4 trillion. But the gross market value of all contracts to be significantly less: approximately $12.7 trillion. The Bottom Line is , When the actual market value of derivatives (rather than notional value) is the focus, the estimate of the size of the derivatives market changes dramatically. However, by any calculation, the derivatives market is quite sizable and significant in the overall picture of worldwide investments. Derivatives ,as the name suggests, they are "derived" products - built upon existing assets and other derivatives. As of now there are thousands of such product categories ranging from simple swaps, futures and options to complex, exotic ones which would give you a good headache trying to figure out what exactly they are. Basically, it's just a huge gamble by the financial community, a bet if you would like. How is the size larger than the entire world economy? Counting the value of the same asset multiple times and using the notional value of the underlying asset rather than the value of the actual transaction. Consider the below: Current oil (brent) price is at say $100/barrel. And let's assume there is only one barrel oil in the world. Person A believes the price will go up to $120 in a month. Person B assumes it will go up to $130. Person A gets a "future" contract to buy it at $115. He pays $1 for the contract rights. Person B gets another at $125, pays $1. Actual value of oil = $100 Value of oil derivatives = $115+$125+$1+$1 = $242 (2.42x) Consider another example - interest rate swap. You take a loan of $1000. Interest rate is base rate + 2%. Assume base is 8% currently. So you will be paying 10% effectively. However, there is a risk that the base rate may go up, thus making you liable to pay more. So you find someone with a higher risk tolerance and do a "swap". He agrees to pay the variable rate (base + 2%) and you agree to pay fixed 10%. If the variable goes up, he loses. If it goes down, you lose. Assume at the end of year one, base is up to 9%. Now the other person needs to pay you 11% and you have to pay him 10%. Obviously the transaction would be a "net" and he will pay you 1% i.e $10. But the calculated, summed "notional value" of the contract would be 11%+10% = 21% = $210. So, multiple people own "rights" over the same underlying assets at the same time and at different points, notional value is used instead of the actual value of the transaction and (BAM!) the value of the derivatives market is bigger than 50 times the world economy.

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