Derivatives market
A derivatives market is any market for a derivative security, that is a contract which specifies the right or obligation to receive or deliver future cash flows based on some future event such as the price of an independent security or the performance of an index.
Derivatives markets can be standardized (many users trading fungible contracts, typically on an exchange)or non-standardized (where derivitives are customized for the user by a trading desk - the over-the-counter market). In finance, fungibility refers to the ability of one security to be easily converted into another related security. For instance, stocks are often listed on several stock exchanges, and a fungible stock would allow you to exchange the shares purchased on one exchange for shares on another. Not all securities are fungible in this way, but those that are somewhat more liquid and protected from volatility on one particular exchange]One derivatives market is for standardized stock options, a market where parties can buy or sell, call or put options on a secondary market. Non-standardized derivatives instruments,such as naked warrants issued directly by financial institutions to a secondary market, also exist.
Other derivative markets include those for interest rate swaps, credit default swaps and options and forwards on foreign exchange.
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Levels
Notional amount
Derivatives are one of the most rapidly growing and changing areas of modern finance. According to the Bank for International Settlements, at the end of June 2004, the "total estimated notional amount of outstanding OTC contracts" at reporting institutions stood at $220 trillion while "exchange-traded contracts" stood at $53 trillion ([1]).
Revenue
From: Office of the Comptroller of the Currency - Quarterly Derivatives Fact Sheet
Trading revenue as a percentage of gross revenue
- JPMorgan Chase
- 03Q4: 9.5
- 04Q1: 21.3
- 04Q2: 10.7
- 04Q3: 3.5
Netting
Main article: derivatives netting
Top 25 commercial banks & TCs with derivatives ($ millions) ([2])
- Total assets: $4,488,259
- Total derivatives (notional amount): $83,801,980
- Bilaterally netted current exposure: $179,146
- Future exposure: $617,596
- Total credit exposure from all contracts: $796,743
- Total credit exposure to capital ratio: 90.5%
See also
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