A:

The derivatives market is, in a word, gigantic, often estimated at more that $1.2 quadrillion. Some market analysts estimate the derivatives market at more than 10 times the size of the total world gross domestic product, or GDP. The reason the derivatives market is so large is because there are numerous derivatives available on virtually every possible type of investment asset, including equities, commodities, bonds and foreign currency exchange. However, some analysts challenge estimates of the size of the derivatives market as vastly overstated.

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 of the market come from adding up the notional value of all available derivatives contracts. But analysts who disagree with the largest estimates of the market argue that such a calculation vastly overstates the reality of derivatives contracts, that the notional value of underlying assets does not accurately reflect the actual market value of derivative contracts based on those 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 in derivatives trading. The only money actually traded in an interest rate swap is the vastly smaller interest payment amounts, sums that are only a fraction of the principal amount.

When 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.

RELATED FAQS
  1. What expiry months are typically available for derivatives?

    Discover more about the derivatives market and learn about the varying expiration months for derivatives in different financial ... Read Answer >>
  2. Can mutual funds invest in derivatives?

    Find out about mutual fund investment options, and understand whether mutual funds are permitted to include investments in ... Read Answer >>
  3. What is the difference between derivatives and swaps?

    Find out more about derivative securities, swaps, examples of derivatives and swaps, and the main difference between derivative ... Read Answer >>
  4. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Answer >>
  5. What are the main risks associated with trading derivatives?

    Understand derivatives trading and learn about the primary risks usually associated with trading in the derivatives market, ... Read Answer >>
Related Articles
  1. Financial Advisor

    What Is A Derivative?

    A derivative is a security whose price is dependent upon or derived from one or more underlying assets. Learn more on how investors can use this financial instrument in their trading strategies.
  2. Trading

    Derivatives 101

    A derivative investment is one in which the investor does not own the underlying asset, but instead bets on the asset’s price movement with another party.
  3. Financial Advisor

    Warrants

    Learn more about this derivative security.
  4. Trading

    Derivatives 101

    Learn how to use this type of investment as an alternative way to participate in the market.
  5. Financial Advisor

    SEC Derivatives Rule May Limit Diversification

    The SEC has proposed rules that will limit the use of derivatives by fund managers. Critics believe the rules will impede funds' ability to diversify.
  6. Trading

    Are Derivatives Safe For Retail Investors?

    These vehicles have gotten a bad rap in the press. Find out whether they deserve it.
  7. Trading

    Futures, Derivatives and Liquidity: More or Less Risky?

    Futures and derivatives get a bad rap after the 2008 financial crisis, but these instruments are meant to mitigate market risk.
  8. Trading

    Understanding Notional Value

    This term is commonly used in the options, futures and currency markets because a very small amount of invested money can control a large position.
  9. Investing

    Buffett Nixes Credit Derivatives From Berkshire Portfolio

    After years of gradually reducing exposure to credit derivatives, Buffett's Berkshire Hathaway finally exits the market completely.
  10. Investing

    Is Your Mutual Fund Safe?

    You might be carrying more risk than you think if your fund invests in derivatives.
RELATED TERMS
  1. Exchange Traded Derivative

    A financial instrument whose value is based on the value of another ...
  2. Derivative Product Company - DPC

    A special-purpose entity created to be a counter-party to financial ...
  3. Derivative

    A security with a price that is dependent upon or derived from ...
  4. Underlying Option Security

    An underlying option security is the financial instrument on ...
  5. Energy Derivatives

    A derivative instrument in which the underlying asset is based ...
  6. Price Swap Derivative

    A derivative transaction in which one party guarantees a fixed ...
Hot Definitions
  1. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  2. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  3. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  4. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  5. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
  6. Efficient Frontier

    A set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a ...
Trading Center