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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.
Futures markets
- Main article: Futures exchange
Futures exchanges, such as
Over-the-counter markets
Tailor-made derivatives traded on a futures exchange, are traded on over-the-counter markets. These consist of
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
- Commodity markets
- Securitization
- Financial engineering