How big is the derivatives market in the US?
Credit, equity and commodity derivatives notional outstanding totaled $9.9 trillion, $6.9 trillion and $2.3 trillion, respectively. The gross market value of OTC derivatives grew by 66.8% to $20.7 trillion at year-end 2022 versus the end of 20212.
Global OTC derivatives notional outstanding totaled $714.7 trillion at the end of June 2023, 13.1% higher than mid-year 2022 and 15.7% higher compared to year-end 20221 (see Chart 1).
The gross market value of outstanding derivatives – summing positive and negative market values – increased by 13% in the second half of 2022 to reach $20.7 trillion at year-end (Graph 1.
The National Stock Exchange of India emerged as the world's largest derivative exchange in 2023 by the number of contracts traded.
In 2022, 29.32 billion futures contracts were traded worldwide, up from 12.13 billion in 2013. The number of options contracts traded increased from 9.42 to 54.53 billion contracts in the same period. Both contracts are financial derivatives, used to manage financial risk and speculate on future market performance.
The derivative market is large due to its inherent nature. Derivatives are contracts that derive their value from underlying assets, which can be anything from commodities to financial instruments. Thus, their value can be significantly larger than the actual derivative.
The Global Derivatives market is anticipated to rise at a considerable rate during the forecast period, between 2023 and 2030. In 2022, the market is growing at a steady rate and with the rising adoption of strategies by key players, the market is expected to rise over the projected horizon.
Buffett devoted one-fifth of his 21-page annual letter to Berkshire shareholders to explaining how he uses derivatives to make long-term bets on stock markets, corporate credit and other factors.
When asked about these positions in an interview on the financial news channel CNBC soon after this letter was published, Buffett stated: "I-well, we've used derivatives for many, many years. I don't think derivatives are evil, per se, I think they are dangerous. I've always said they're dangerous.
Goldman Sachs, Bank of America Merrill Lynch and Morgan Stanley have maintained their positions as the leading brokers of flow equity derivatives to North American institutional investors.
What is the US derivatives market?
Derivatives markets provide for price discovery and risk transfer for securities, commodities, and currencies. Derivatives include both standardized; exchange-traded instruments and bespoke contracts negotiated between broker/dealers and customers that have unique needs not easily satisfied by standard products.
The CME Group is the world's largest futures exchange and offers trading in a broad range of futures and options contracts across asset classes, including agricultural commodities, energy, metals, equity indexes, and foreign exchange. The exchange was founded in 1898 and is headquartered in Chicago, Illinois.
Five of the more popular derivatives are options, single stock futures, warrants, a contract for difference, and index return swaps. Options let investors hedge risk or speculate by taking on more risk. A stock warrant means the holder has the right to buy the stock at a certain price at an agreed-upon date.
The Chicago Mercantile Exchange (CME)
The Chicago Mercantile Exchange was founded in 1898 as the "Chicago Butter and Egg Board" before changing its name in 1919. It is the third-largest derivatives exchange in the world and the largest in the United States.
Worldwide volume of exchange-traded derivatives reached 15.17 billion contracts in December, the highest level ever recorded. This was up 8.4% from November 2023 and up 79.7% from December 2022.
- Gold. ...
- Natural Gas. ...
- Soybeans. ...
- Corn. ...
- Brent Crude Oil. ...
- Sugar. ...
- Silver. ...
- Wheat. Wheat is a staple agricultural commodity, and its trading volume is substantial due to its widespread global consumption.
- Forward Contracts.
- Future Contracts.
- Options Contracts.
- Swap Contracts.
Exchange-traded derivatives are standardized contracts that trade on regulated exchanges. These include listed options and futures products. In general, the listed market is smaller in size than the over-the-counter (OTC) derivatives market.
Loss of flexibility.
The standardized contracts of exchange-traded derivatives cannot be tailored and therefore make the market less flexible.
Counterparty risk, or counterparty credit risk, arises if one of the parties involved in a derivatives trade, such as the buyer, seller, or dealer, defaults on the contract. This risk is higher in over-the-counter, or OTC, markets, which are much less regulated than ordinary trading exchanges.
What is the most desirable use of the derivative market?
1. Risk Management: The best tool for risk hedging, or the process of reducing risk in one investment by making another, is a derivative. Derivatives are commonly utilized as a kind of risk insurance and as a way to lower market risk.
While derivatives can be a useful risk-management tool for investors, they also carry significant risks. Market risk refers to the risk of a decline in the value of the underlying asset. This can happen if there is a sudden change in market conditions, such as a global financial crisis or a natural disaster.
There is no meaningful regulation of the derivatives markets at the state or local levels, and the CFTC, with certain exceptions, acts as the sole and exclusive regulator of that activity at the federal level.
The term is credited to the famous investor Warren Buffett, who has also called derivatives "financial weapons of mass destruction." A derivative is a financial contract whose value is tied to an underlying asset.
Merton posits that derivatives themselves cannot be the cause of a financial crisis. They are simply tools that can be used either functionally (to reduce risk) or dysfunctionally (in ways that increase risk without offsetting benefits). He also offers prescriptions for making the financial markets safer.