The global derivatives market

This chapter attempts to de-mystify derivatives. It starts by explaining the types of derivatives used globally, and observes that derivatives could be deconstructed by their economic functions into two straightforward categories: option contracts and guarantees. The chapter then discusses the types of derivatives markets: exchange-traded and over-the-counter. It also explains the uses of derivatives for hedging and risk management and as well as for generating income by taking advantage of price fluctuations in underlying assets. Thereafter, the chapter describes the sizes of exchange traded and over-the-counter derivatives markets, explaining the difference between ‘notional amount’ and risk exposure when measuring size. The chapter then turns to how derivatives are documented, and also to how they are cleared and settled. The chapter also examines how derivatives are regulated, including the so-called central clearing mandate, and analyses how regulation might be improved. Finally, the chapter explores possible new future uses of derivatives.