The derivatives market is, in a word, gigantic – often estimated at more that $1.2 quadrillion on the high end. How can that be? 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 themselves 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 actually 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

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.