Derivatives market

Derivatives market

The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets.

The market can be divided into two, that for exchange-traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different as well as the way they are traded, though many market participants are active in both.


Futures markets

Futures exchanges, such as Euronext.liffe and the Chicago Mercantile Exchange, trade in standardized derivative contracts. These are options contracts and futures contracts on a whole range of underlying products. The members of the exchange hold positions in these contracts with the exchange, who acts as central counterparty. When one party goes long (buys a futures contract), another goes short (sells). When a new contract is introduced, the total position in the contract is zero. Therefore, the sum of all the long positions must be equal to the sum of all the short positions. In other words, risk is transferred from one party to another. The total notional amount of all the outstanding positions at the end of June 2004 stood at $53 trillion. (source: Bank for International Settlements (BIS): [1]). That figure grew to $81 trillion by the end of March 2008 (source: BIS [2])

Over-the-counter markets

Tailor-made derivatives not traded on a futures exchange are traded on over-the-counter markets, also known as the OTC market. These consist of investment banks who have traders who make markets in these derivatives, and clients such as hedge funds, commercial banks, government sponsored enterprises, etc. Products that are always traded over-the-counter are swaps, forward rate agreements, forward contracts, credit derivatives, etc. The total notional amount of all the outstanding positions at the end of June 2004 stood at $220 trillion. (source: BIS: [3]). By the end of 2007 this figure had risen to $596 trillion and in 2009 it stood at $615 trillion. (source: BIS: [4])



US: Figures below are from SECOND QUARTER, 2008 [5]

  • Total derivatives (notional amount): $182.2 trillion (SECOND QUARTER, 2008)
    • Interest rate contracts: $145.0 trillion (80%)
    • Foreign exchange contracts: $18.2 trillion(10%)
    • 2008 Second Quarter, banks reported trading revenues of $1.6 billion
  • Total number of commercial banks holding derivatives: 975


According to Bank for International Settlements "$516 trillion at the end of June 2007"

Positions in the OTC derivatives market have increased at a rapid pace since the last triennial survey was undertaken in 2004. Notional amounts outstanding of such instruments totalled $516 trillion at the end of June 2007, 135% higher than the level recorded in the 2004 survey (Graph 4). This corresponds to an annualised compound rate of growth of 33%, which is higher than the approximatively 25% average annual rate of increase since positions in OTC derivatives were first surveyed by the BIS in 1995. Notional amounts outstanding provide useful information on the structure of the OTC derivatives market but should not be interpreted as a measure of the riskiness of these positions. Gross market values, which represent the cost of replacing all open contracts at the prevailing market prices, have increased by 74% since 2004, to $11 trillion at the end of June 2007. (page 28, [7]

Controversy about the financial crisis

The derivative markets have been accused lately for their alleged role in the financial crisis of 2007-2010. The leveraged operations are said to have generated an “irrational appeal” for risk taking, and the lack of clearing obligations also appeared as very damaging for the balance of the market. The G-20’s proposals for financial markets reform all stress these points, and suggest:

  • higher capital standards
  • stronger risk management
  • international surveillance of financial firms' operations
  • dynamic capital rules.

See also

Further reading

External links

  • PBS (WGBH, Boston), "The Warning", Frontline TV public affairs program, October 20, 2009. "At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008."
  • History and Types of Derivatives markets 1MTX Glossary

Wikimedia Foundation. 2010.

Нужен реферат?

Look at other dictionaries:

  • derivatives market — noun A market where various financial derivatives such as forwards, futures, options, and swaps are bought and sold …   Wiktionary

  • Italian Derivatives Market — A derivatives exchange headquartered in Milan, Italy. The Italian Derivatives Market is a part of the Borsa Italiana, which is owned by the London Stock Exchange. The IDEM allows trades of futures contracts on indices, equities and commodities… …   Investment dictionary

  • Italian Derivatives Market — ( IDEM) A derivatives market operated by the Italian Stock Exchange Council. It trade futures and options on the 30 index and individual stock options . Bloomberg Financial Dictionary See: Italian Stock Exchange. Bloomberg Financial Dictionary …   Financial and business terms

  • Market maker — Financial markets Public market Exchange Securities Bond market Fixed income Corporate bond Government bond Municipal bond …   Wikipedia

  • Market identification code — Financial markets Public market Exchange Securities Bond market Fixed income Corporate bond Government bond Municipal bond …   Wikipedia

  • market garden — noun Brit. a place where vegetables and fruit are grown for sale. Derivatives market gardener noun market gardening noun …   English new terms dictionary

  • market research — noun the activity of gathering information about consumers needs and preferences. Derivatives market researcher noun …   English new terms dictionary

  • market power — ➔ power1 * * * market power UK US noun [U] FINANCE, COMMERCE ► the ability of a company to control prices in a particular industry: »Banks can use market power to dominate narrow derivatives markets. »Individual insurers have some market power to …   Financial and business terms

  • market — ► NOUN 1) a regular gathering for the purchase and sale of food, livestock, or other commodities. 2) an outdoor space or large hall where vendors sell their goods. 3) a particular area of commercial or competitive activity. 4) demand for a… …   English terms dictionary

  • derivatives — (1) Financial instruments whose value depends upon the values of underlying assets, interest rates, currency exchange rates, or indexes. Various authorities define derivative instruments in broad, inclusive terms or narrow, exclusive terms. It is …   Financial and business terms

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”