Derivatives
Derivatives markets trade a range of complex products based on the underlying instruments such as indices, interest rates, currencies, commodities and credit risk. The derivatives are available both on the OTC market and exchanged traded market. An OTC market is where the trading occurs directly between parties. Europe still dominates the OTC trading of the derivatives. Based on the notional amounts outstanding, the OTC derivatives markets are about 4 times the size of stock quoted in the stock exchanges. However, trading of derivatives are started to move from OTC market to exchanged traded market. Chicago Mercantile Exchange is considered the largest exchanged traded derivatives market. Interest rate derivatives contracts are the most common form of outstanding derivatives contracts through the interest rate swaps. The interest rates derivatives markets are dominated by the US dollar and Euro. The growth in the derivative market is due to the stock market crash in 2000-2002as traders sough to hedge their position against interest rate risk. The second largest segment is foreign exchange derivatives which are used to speculate on currency movements and hedge the risks of currency positions.
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