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). 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.

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 (http://www.bis.org/publ/regpubl.htm).

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) (http://www.occ.treas.gov/deriv/deriv.htm)

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%