With nearly $700 trillion in notional value – over seven times the market capitalisation of global stocks or over five times global GDP – the sheer volume of Financial Derivatives dwarfs any other forms of financial instrument. In this blog, derivatives expert Philippe Dufournier reflects on the challenges and opportunities presented by these mechanisms.

By definition, Financial Derivatives are a contract by which two parties agree to exchange in the future (i) cash flows or assets (ii) the values of which are indexed to changes in financial variables such as foreign exchange, interest rates, commodities, equity and credit and (iii) at terms agreed upon today. Contracts are bilateral, confidential in nature and involve either two private parties in what is called the Over-the-Counter (OTC) market or a private party and a Derivatives Exchange, in the case of an exchange-traded contract.

(more…)