Derivatives are an important class of financial instruments that are central to today’s financial markets. They offer various types of risk protection and allow innovative investment strategies. In the last 30 years, derivatives have become increasingly important in finance.
Derivatives are financial contracts that are designed to create market price exposure to changes in an underlying commodity or asset. In general they do not involve the exchange or transfer of principal or title. A derivative is defined by the Bank for International Settlements (BIS) as “a contract whose value depends on the price of underlying assets, but which does not require any investment of principal in those assets“.
The global market for derivatives covers just about every asset in the world. The innovation of financial derivatives and trading them on the financial market is of great significance, allowing adaptation of business entities in this new environment in the global economy. Derivative instruments balance business and financial transactions by reducing market risks associated with price oscillation, interest rates and exchange rates. As a result of high profitability in the new field of trading and risk management in the area of derivative transactions, the main participants are the big financial and non-financial institutions in the role of hedgers, speculators and arbiters. By applying derivative instruments, we enable detection of price arbitrage, hedging and speculation, risk management, protection and betting on price changes in order to yield profit.
The globalization of investment flows encourages the growth of transactions on the financial derivatives market, the opening of new forward markets, the development of Over the Counter Market (OTC), the introduction of new types of financial derivatives and the development of new derivatives strategies.
Derivatives are an important class of financial instruments that are central to today’s financial and trade markets.
According to the most recent data from the Bank for International Settlements (BIS), as of June 2011, the over-the-counter (OTC) derivatives market amounted to approximately $700 trillion, and the size of the market traded on exchanges totaled an additional $83 trillion.
For the fourth quarter 2017 the European Securities Market Authority estimated the size of European derivatives market at a size of €660 trillion with 74 million outstanding contracts. The reason the derivatives market is so large is because there are numerous derivatives available on virtually every possible type of investment assets including equities, commodities, bonds and foreign currency exchange