Even writing a $1B loan doesn't create $1B in value. You start with Alice having nothing and Bob having $1B in cash, then you end with Alice having $1B in cash,

Even writing a $1B loan doesn't create $1B in value. You start with Alice having nothing and Bob having $1B in cash, then you end with Alice having $1B in cash, $1B in debt, and Bob having a $1B loan asset, which nets to $1B in total value. The value it creates is that Alice can spend that cash on an activity that creates greater economic returns. If that $1B allows her to build a factory worth $1.2B, the act of creating the loan has created $200M in value. Derivatives are a financial optimization of this idea. Swaps were created because they have lower transaction costs than other mechanisms. A $1B swap doesn't allow you to build a factory, it just moves some of the risk of your business around at the edges, and so the value created by the swap is correspondingly less than the value created by a loan with an amount equal to the swap's notional principal. If you swap your floating interest rate to a fixed, maybe that means your risk of default is 5% lower so your factory increases in value from $1.2B to $1.26B, even though the notional value of this swap is $1B. Much less than the loan. That's why as ddeck pointed out, the actual market value of swaps is dwarfed by the market value of debts. In case anyone wants to engage with this, I'm not talking about hedge funds here, I'm talking about the point where the financial world bottoms out in the world of physical goods and services. The fact that hedge funds can create returns with swaps is beside my point, and is something that I'm uninterested in discussing.