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Suppose you have some expectation about the closing value of the S&P500 in a month's time. You can bet on it using a variety of financial instruments, e.g. opti
by T-A 5y ago
Suppose you have some expectation about the closing value of the S&P500 in a month's time. You can bet on it using a variety of financial instruments, e.g. options and futures.
How much you bet is up to you and your counterparty; the amount is not in any way constrained by the actual value of the companies in the S&P500.
And that's how the size of the derivatives market can look like this when compared to the stock market:
https://www.visualcapitalist.com/all-of-the-worlds-money-and-markets-in-one-visualization-2020/ https://www.visualcapitalist.com/all-of-the-worlds-money-and...
- quickthrowman 5y agoThe stock market is $89T and the derivatives market is $11T. Notional value is somewhat meaningless, tomorrow you could buy a single out of the money SPX 0DTE option for $100 that has a notional value of $423,900
- danielmarkbruce 5y agoYou are right in that the amount isn't constrained. But the net value of a derivative contract is zero. Ie, it's not right to say the "value". The term "notional value" is used for this reason. To further make the point - there isn't always an asset underlying a derivative - for example there is a notional value of weather derivatives. In summary, the word "value" gets thrown around loosely.
- baq 5y agofor good reason. it is impossible to define strictly in general.
- danielmarkbruce 5y agoThere isn't a good reason to throw around the term loosely when talking about a specific field where the terms are quite well defined, like the one I gave. Folks should use the right terms if they genuinely want to communicate ideas.