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Encyclopedia > Derivatives market

The derivatives markets are the financial markets for derivatives. 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. In economics, a financial market is a mechanism which allows people to trade money for securities or commodities such as gold or other precious metals. ... A derivative is a generic term for specific types of investments from which payoffs over time are derived from the performance of assets (such as commodities, shares or bonds), interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI) or an index of weather... A derivative is a generic term for specific types of investments from which payoffs over time are derived from the performance of assets (such as commodities, shares or bonds), interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI) or an index of weather... A derivative is a generic term for specific types of investments from which payoffs over time are derived from the performance of assets (such as commodities, shares or bonds), interest rates, exchange rates, or indices (such as a stock market index, consumer price index (CPI) or an index of weather...

Contents

Futures markets

Main article: Futures exchange

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. 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]) A futures exchange, or futures and options exchange is a corporation or mutual organization which provides the facilities to trade derivatives such as futures contracts and options. ... Euronext. ... President George W. Bush at the CME (March 6, 2001). ... In finance, an option is a contract whereby one party (the holder or buyer) has the right but not the obligation to exercise a feature of the contract (the option) on or before a future date (the exercise date or expiry). ... In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a pre-set price. ... In finance, an underlying is an investment from which a derivative security is derived. ... In finance, a long position in a security, such as a stock or a bond, or equivalently to be long a security, means the holder of the position owns the security. ... It has been suggested that this article or section be merged with Short selling. ... Nominal or notional amounts outstanding are defined as the gross nominal or notional value of all deals concluded and not yet settled on the reporting date. ... BIS Headquarters in Basel The Bank for International Settlements (or BIS) is an international organization of central banks which exists to foster cooperation among central banks and other agencies in pursuit of monetary and financial stability. It carries out its work through subcommittees, the secretariats it hosts, and through its...


Over-the-counter markets

Tailor-made derivatives traded on a futures exchange, are traded on over-the-counter markets. 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: [2]) ................. To meet Wikipedias quality standards, this article or section may require cleanup. ... A market maker is a person or a firm which quotes a buy and sell price in a financial instrument or commodity hoping to make a profit on the turn or the bid/offer spread. ... Generally, a hedge fund is a lightly regulated private investment fund often characterized by unconventional investment strategies and often making use of legal structures (sometimes offshore) to mitigate the effects of local regulation and tax regimes. ... A commercial bank is a type of financial intermediary and a type of bank. ... The government sponsored enterprises (GSEs) are a group of financial services corporations created by the United States Congress. ... Over-the-counter (OTC) trading is to trade financial instruments such as stocks, bonds, or derivatives directly between two parties. ... In finance a swap is a derivative, where two counterparties exchange one stream of cash flows against another stream. ... This article needs to be cleaned up to conform to a higher standard of quality. ... A forward contract is an agreement between two parties to buy or sell an asset (which can be of any kind) at a pre-agreed future point in time. ... A credit derivative is a contract (derivative) to transfer the risk of the total return on a credit asset falling below an agreed level, without transfer of the underlying asset. ... Nominal or notional amounts outstanding are defined as the gross nominal or notional value of all deals concluded and not yet settled on the reporting date. ...


Netting

Global: The notional outstanding value of OTC derivatives contracts rose by 36% from $197 trillion at end-2003 to $270 trillion in June 2005. Since end-2000, notional value has increased nearly threefold. Average daily global turnover rose from $764bn to $1508bn between April 2001 and April 2004. The UK reinforced its position as the leading derivatives center with its share of turnover rising from 36% to 43% during this period.


Interest rate instruments remain the key driver of global trading, accounting for 76% of notional value. Derivatives based on foreign exchange contracts also form an important sphere of activity as do equity-linked and commodity contracts. Credit, energy, metal and freight derivatives have grown rapidly in recent years. The euro and the US dollar dominate interest rate derivatives worldwide with 37% and 35% shares respectively based on notional value in June 2005. Turnover data for April 2004 indicated a rather higher share for euro-based derivatives trading. Financial institutions such as hedge funds, mutual funds, insurance companies and smaller banks have become much bigger users of derivatives. [3]


US: Figures below are from September, 2005 [4]

  • Total derivatives (notational amount): $96.2 trillion (September, 2005)
    • Interest rate contracts: $82.0 trillion
    • Foreign exchange contracts: $8.6 trillion
  • Total number of commercial banks holding derivatives: 769

See also


This article or section is missing references or citation of sources. ... Securitization is a financing technique that allows the corporation to separate credit origination and funding activities. ... Financial engineering is the application of science-based mathematical and statistical models to make a better decision about managing financial risks, investing, borrowing, lending, and saving. ...

Financial markets

Economic subtypes: Capital markets (Stock markets, Bond markets | Primary markets, Secondary markets) | Derivatives markets (Futures Markets)
Money markets | Insurance markets | Foreign exchange markets | Commodity markets In finance, financial markets facilitate: The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); and International trade (in the currency markets). ... The capital market is the market for long-term loans and equity capital. ... The New York Stock Exchange A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. ... The bond market refers to people and entities involved in buying and selling of bonds and the quantity and prices of those transactions over time. ... The primary market is the financial market for the initial issue and placement of securities. ... The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. ... A futures exchange, or futures and options exchange is a corporation or mutual organization which provides the facilities to trade derivatives such as futures contracts and options. ... To meet Wikipedias quality standards, this article may require cleanup. ... The examples and perspective in this article or section may not represent a worldwide view. ... The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. ... This article or section is missing references or citation of sources. ...


Organisations: Stock exchange | Futures exchange A futures exchange, or futures and options exchange is a corporation or mutual organization which provides the facilities to trade derivatives such as futures contracts and options. ...


Related Topics: List of stock exchanges | List of futures exchanges | Lloyd's of London | List of stock market indices This is a list of stock exchanges. ... // North America Canada Montreal Exchange Winnipeg Commodity Exchange USA Chicago Board Options Exchange (CBOE) Chicago Board of Trade (CBOT) Chicago Butter and Egg Board, precursor to the Chicago Mercantile Exchange (CME) Chicago Climate Exchange Chicago Mercantile Exchange (CME) Commodity Exchange (COMEX), now a division of NYMEX International Monetary Market (IMM... Lloyd’s Building, London (with the blue cranes). ... Commonly used stock market indices include: // Global Large companies not ordered by any nation or type of business (in alphabetical order). ...



  Results from FactBites:
 
IPD's Capacity Building and Journalism Program; Economic Journalism Training (3473 words)
Derivatives facilitate risk management by allowing a person to reduce his exposure to certain kinds of risk by transferring those risks to another person that is more willing and able to bear such risks.
Derivatives were used to hide debt that should be reported in regular corporate reports, fabricate income on the same corporate reports and dodge taxes to the government.
A series of derivatives between the same counterparties can be abused to create a loan from one firm to another that is not reported as debt but rather as income in one period when the "loan" is made and then a loss in a later period when the "loan" is repaid.
FDIC: FYI - Derivatives Risk in Commercial Banking (6527 words)
Derivatives are important to the financial markets and the world economy because they provide a means for companies to separate and trade various kinds of risks.
Derivatives dealers are exposed to at least the same risks as hedgers, and they incur additional operational risks as a result of the sheer volume of derivatives activity they undertake.
Derivatives concentration risk is similar in concept to an industry concentration in that the counterparties to a dealer have an economic interrelationship through their involvement in a derivatives market that is dominated by a few dealers.
  More results at FactBites »

 
 

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