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Understanding Derivatives Chapter 1 Derivatives Overview PDF
Understanding Derivatives Chapter 1 Derivatives Overview PDF
01
Derivatives Overview
Richard Heckinger, vice president and senior policy advisor, financial markets,
Federal Reserve Bank of Chicago, and David Mengle, senior manager, over-
the-counter derivatives, National Futures Association
Exchange-traded Derivatives
Measuring exchange-traded derivatives transactions is fairly straightforward. Transactions are
measured by the number of traded contracts (trades have both a buyer and seller, so only one
side is counted) and the amount of open interest. Open interest is the total number of contracts
that are not closed or delivered.
Over-the-Counter Derivatives
Measuring OTC derivatives trades is some-
what more complex, because an OTC deriv-
BM&FBOVESPA (Brazil)
CME Group (Chicago, New York) atives trade or swap typically has two parts—
Chicago Board Options Exchange (CBOE) the monetary amount that the trade counter-
Eurex (Frankfurt) parties agree to swap and the principal amount
MICEX-RTS (Moscow)
or notional value upon which the swap is
NASD OMX (New York)
NYSE Euronext (New York) based. Notional values are reported by the
National Stock Exchange of India (Mumbai) Bank for International Settlements (BIS)
(see figure 3), but these amounts make the
OTC market seem much bigger than the
3. Notional Amounts and Gross Market Value of
OTC Derivatives by Risk Category actual values that change hands.2
Another way to measure OTC trades
in billions of $
is to think about the mark-to-market value
$600,000
of open positions. This measure is called
500,000
gross market value, which is the estimated
400,000 amount that could be received or paid for
300,000
unwinding a transaction (replacement value)
on the reporting date. As shown in figure 3,
200,000
these amounts are a small percentage of
100,000 notional amounts, ranging from about 2%
0 to 6% of notional value.3
Notional Gross Notional Gross Notional Gross
1
amount market amount market amount market Data are available at www.world-exchanges.org/statistics.
value value value The Futures Industry Association (FIA) is also a good
FX contracts Interest rate Credit default source of data; see www.futuresindustry.com.
contracts swaps 2
The exception to this reporting is cross-currency interest
rate swaps, where notional amounts are actually swapped.
Dec. 2010 3
For a useful discussion of OTC terminology, see ISDA (2008).
Dec. 2011
Dec. 2012
References
Bank for International Settlements (BIS), 2012, “Principles for financial market infra-
structures,” report, April, available at www.bis.org/publ/cpss101a.pdf.
Black, F. and M. Scholes, 1973, “The pricing of options and corporate liabilities,”
Journal of Political Economy, Vol. 81, No. 3, pp. 637–654.
International Swaps & Derivatives Association Inc. (ISDA), 2008, “The ISDA market
survey: What the results show and what they don’t,” ISDA Research Notes, Number 1,
Autumn, available at www.isda.org/researchnotes/pdf/researchnotes-Autumn2008.pdf.
McDonald, Robert L., 2006, Derivatives Markets, 2nd ed., Boston: Addison Wesley.