Global Derivatives Market now valued at $1.14 Quadrillion

  • #1
Ivan Seeking
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I have a friend who claims that we have only seen the tip of the iceberg wrt the global derivatives market. I am posting this because I don't know enough about his concerns to address subject - I don't know if this is a credible concern or not. His perspective is that, less China, global financial collapse is all but a certainty.
http://jutiagroup.com/2008/07/24/global-derivatives-market-now-valued-at-114-quadrillion/

Also, I didn't spot a good answer to this. Does anyone have a good link showing the US dollar equivalent of ~ all of currency that exists globally, at this time.

My assumption has been that there are derivatives, and then there are unfunded derivatives. His understanding is that we have a quadrillion dollars in unfunded or highly leveraged derivatives, which far exceeds the global gdp. He claims that the true scope of the problem is not being reported.
 
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  • #2
russ_watters
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Does he have more up to date numbers than that because an awful lot of value was lost over the past 9 months and the number in the link is 16 months old.

And the question you are asking, about currency that exists - do you mean actual cash or GDP or what? A google for "world gdp" yields $55 Trillion for 2007.
 
  • #3
LowlyPion
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He claims that the true scope of the problem is not being reported.
I'm sure this is the case.
 
  • #4
russ_watters
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Here's a link that says the sum of all the world's assets was $167 Trillion in 2008: http://www.slate.com/id/2202263/

It also has some insight as to the meaning of that number you had, Ivan.
 
  • #5
Ivan Seeking
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Thanks, Russ. Yes, the total value of the world's assets was what I was looking for.

As for the link that I posted, I just grabbed what looked like a respectable report of the numbers.
 
  • #6
mheslep
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Here's a link that says the sum of all the world's assets was $167 Trillion in 2008: http://www.slate.com/id/2202263/

It also has some insight as to the meaning of that number you had, Ivan.
In particular:

An alternative way to measure the size of the derivatives market is to calculate the instruments' market value—which refers to how much they would be worth if the contracts had to be settled today. Gross market value of all outstanding derivatives was $14.5 trillion at the end of 2007, less than one-fortieth of the $596 trillion estimate. (That number shrinks to about $3.3 trillion once you take into account contracts that directly offset one another.)
The difference between notional and market valuations of derivatives is commonly understood by people working in the business (not me), and would be communicated to any Congressman spending 5 minutes on the phone with knowledgeable people, so my take is that when (if) a Harkin uses those the notional numbers he's intentionally being misleading on the subject.
 
  • #7
mgb_phys
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His understanding is that we have a quadrillion dollars in unfunded or highly leveraged derivatives, which far exceeds the global gdp. He claims that the true scope of the problem is not being reported.
Is that really a problem?
These are closed deals that go round in circles between a few institutions - do they really matter?

I sold my dog a $1Tr futures contract on next weeks dog food, he leveraged that with the cat who sold it back to me. It doesn't mean that the economy is down $1Tr if the cat doesn't pay (which he won't - he only ever coughs up hairballs).
 
  • #8
misgfool
I sold my dog a $1Tr futures contract on next weeks dog food, he leveraged that with the cat who sold it back to me. It doesn't mean that the economy is down $1Tr if the cat doesn't pay (which he won't - he only ever coughs up hairballs).
But you are not seeing that the cat sold $9Tr to your neighbors too. Now the economy isn't down, if the neighbors haven't used the imaginary $9Tr to increase their gdp.
 
  • #9
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But you are not seeing that the cat sold $9Tr to your neighbors too. Now the economy isn't down, if the neighbors haven't used the imaginary $9Tr to increase their gdp.
Does increasing their GDP mean adding numbers to one side of a ledger sheet? How is this a problem?
 
  • #10
misgfool
Does increasing their GDP mean adding numbers to one side of a ledger sheet? How is this a problem?
No. This goes a bit offtopic, but if you must know, a black hole emerged and ate the futures contract papers.
 
  • #11
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II sold my dog a $1Tr futures contract on next weeks dog food, he leveraged that with the cat who sold it back to me.
Indeed, this would be called not 1 but 3 trillion - three separate 1T transactions. That's why I feel market value makes more sense.
 
  • #12
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This was Warren Buffets analysis last year (his letter to investors in 2008 using 2007 stats)...demonstrates some interesting comparisons.

http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid={B9E54A5D-4796-4D0D-AC9E-D9124B59D436}

" In short, despite Buffett's clear warnings, a massive new derivatives bubble is driving the domestic and global economies, a bubble that continues growing today parallel with the subprime-credit meltdown triggering a bear-recession.
Data on the five-fold growth of derivatives to $516 trillion in five years comes from the most recent survey by the Bank of International Settlements, the world's clearinghouse for central banks in Basel, Switzerland. The BIS is like the cashier's window at a racetrack or casino, where you'd place a bet or cash in chips, except on a massive scale: BIS is where the U.S. settles trade imbalances with Saudi Arabia for all that oil we guzzle and gives China IOUs for the tainted drugs and lead-based toys we buy.
To grasp how significant this five-fold bubble increase is, let's put that $516 trillion in the context of some other domestic and international monetary data:

*
U.S. annual gross domestic product is about $15 trillion
*
U.S. money supply is also about $15 trillion
*
Current proposed U.S. federal budget is $3 trillion
*
U.S. government's maximum legal debt is $9 trillion
*
U.S. mutual fund companies manage about $12 trillion
*
World's GDPs for all nations is approximately $50 trillion
*
Unfunded Social Security and Medicare benefits $50 trillion to $65 trillion
*
Total value of the world's real estate is estimated at about $75 trillion
*
Total value of world's stock and bond markets is more than $100 trillion
*
BIS valuation of world's derivatives back in 2002 was about $100 trillion
*
BIS 2007 valuation of the world's derivatives is now a whopping $516 trillion

Moreover, the folks at BIS tell me their estimate of $516 trillion only includes "transactions in which a major private dealer (bank) is involved on at least one side of the transaction," but doesn't include private deals between two "non-reporting entities." They did, however, add that their reporting central banks estimate that the coverage of the survey is around 95% on average. "
 
  • #13
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The $516T is telling us something - it's telling us that notional value isn't the right way to evaluate this.

Let's consider a very simple derivative - the option. Suppose you have an option to buy 1000 shares of XYZ Corp at $99/share. Further suppose that XYZ is trading at $100/share. How much are the options worth?

I think most of us would say $1000 - one could exercise the options and buy 1000 shares for $99,000 and turn around and sell them for $100,000. Actually, it's probably less than this, when you consider transaction fees, but let's ignore that.

The notional value of these options is not $1000, though. It's $100,000 - the value of the underlying securities. I don't think anyone would say this derivative is worth $100,000. But that's how these quadrillion dollar numbers are calculated.
 
  • #14
mheslep
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The $516T is telling us something - it's telling us that notional value isn't the right way to evaluate this.

Let's consider a very simple derivative - the option. Suppose you have an option to buy 1000 shares of XYZ Corp at $99/share. Further suppose that XYZ is trading at $100/share. How much are the options worth?

I think most of us would say $1000 - one could exercise the options and buy 1000 shares for $99,000 and turn around and sell them for $100,000. Actually, it's probably less than this, when you consider transaction fees, but let's ignore that.

The notional value of these options is not $1000, though. It's $100,000 - the value of the underlying securities. I don't think anyone would say this derivative is worth $100,000. But that's how these quadrillion dollar numbers are calculated.
A fine, very clear example V 50. I'm afraid you are swimming against the tide though, some folks just like horror movies.
 
  • #15
mheslep
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U.S. annual gross domestic product is about $15 trillion
*
U.S. money supply is also about $15 trillion
*
Current proposed U.S. federal budget is $3 trillion...
Sorry to quibble, but you rounded off $500B off the budget there (budget 2009 passed at $3.5T) and rounded $800B high on GDP (2008 dollars) which is ~falling. Just couldn't see sliding past that much money yet.
http://news.yahoo.com/s/afp/20090403/ts_alt_afp/uspoliticsbudgetlead [Broken]
 
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  • #16
mgb_phys
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The notional value of these options is not $1000, though. It's $100,000 - the value of the underlying securities. I don't think anyone would say this derivative is worth $100,000.
The real problem is the leveraged derivatives - a bet on the ratio or difference between two shares.
So if one share is $10 and the other is $9, your contract is for 10x the difference - what is it worth if the second share becomes a penny stock.
 
  • #17
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Sorry to quibble, but you rounded off $500B off the budget there (budget 2009 passed at $3.5T) and rounded $800B high on GDP (2008 dollars) which is ~falling. Just couldn't see sliding past that much money yet.
http://news.yahoo.com/s/afp/20090403/ts_alt_afp/uspoliticsbudgetlead [Broken]
Those stats were quoted from Warren Buffets letter to his shareholders in 08 and based on 07 figures.
 
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  • #18
mheslep
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Those stats were quoted from Warren Buffets letter to his shareholders in 08 and based on 07 figures.
oh, yes I see now.
 
  • #19
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A fine, very clear example V 50.
Thanks. I hope it's right.

The place I am not sure of is because it requires two transactions to exercise the option, the notional value may actually be $200,000. I think it's not, because the same 1000 shares are involved, but I am not 100% sure.

I'm more worried about the number of decimal places than the first digit anyway.

The real problem is the leveraged derivatives - a bet on the ratio or difference between two shares.
So if one share is $10 and the other is $9, your contract is for 10x the difference - what is it worth if the second share becomes a penny stock.
That example is actually another reason not to confuse notional value with market value. If the second stock becomes worth a penny, the market value of this contract is -$99.90 per share. The notional value is the value of the underlying security - in this case, a penny.

Which number better reflects the risk?
 
  • #20
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I ask several days ago, but got blown-off.

To be more precise, how is the Volume Bubble in the leverage market a problem?. How is volume, or whatever, an economic problem waiting to happen?
 
  • #21
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The "volume" includes derivatives of every type. The majority are considered safe.

First the definition
http://www.investopedia.com/terms/d/derivative.asp

A derivative is actually a contract between parties and terms vary. The practice is unregulated.

It started with the Commodity Futures Modernization Act. Out of control speculative and over-leveraged derivatives markets were clearly not what Clinton intended.
http://www.wisegeek.com/what-is-the-commodity-futures-modernization-act.htm
"Bill Clinton: I should have better regulated derivative(Clinton Global Initiative Universitys)
cnn.com/ ^ | 02/15/09 | Bill Clinton

Posted on Monday, February 16, 2009 1:17:50 PM by shielagolden

AUSTIN, Texas (CNN) -- Former President Bill Clinton was in Austin, Texas, over the weekend to host the Clinton Global Initiative University, which encourages college students and administrators to come up with creative ways to address global issues.

Former President Bill Clinton praises the Obama administration's handling of the stimulus bill. CNN's John Roberts sat down with Clinton to ask him about how the Obama administration is performing, how his wife, Hillary Clinton, is doing as secretary of state, and what responsibility he may have for the current financial crisis. John Roberts:

Mr. President, in terms of the overall economic downturn, Time magazine had an article out this week in which it named 25 of the people most responsible for the economic downturn, and you were there. They, they had a picture of you in what looked like a police lineup. They had a little button where you could vote who's the most responsible? They pointed to your signing of the Gramm-Leach-Bliley Act, the Commodity Futures Modernization Act.

(Excerpt) Read more at cnn.com ..."

This is also a good read
http://www.pensionriskmatters.com/2009/01/articles/derivatives/private-equity-and-derivatives-double-whammy-or-blissful-combo/



The truthful answer to your question is "nobody knows for sure".



Last...to put the problem into perspective...from roughly May 2008 until November 2008, it was reported the SEC Chair and Fed Reserve Chair were attending classes taught by leading hedgefund managers to learn about derivatives markets, valuation and risk. (It's been posted previously in other threads)
 
  • #22
Astronuc
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AUSTIN, Texas (CNN) -- Former President Bill Clinton was in Austin, Texas, over the weekend to host the Clinton Global Initiative University, which encourages college students and administrators to come up with creative ways to address global issues.
What is it with people like Clinton who have to put their name on such things. There are numerous programs, many which have been around for some time, which are addressing 'global issues'. It seems that Clinton, Gore and others are rather oblivious to such programs and feel compelled to be 'redundant'. :rolleyes:

Former President Bill Clinton praises the Obama administration's handling of the stimulus bill. CNN's John Roberts sat down with Clinton to ask him about how the Obama administration is performing, how his wife, Hillary Clinton, is doing as secretary of state, and what responsibility he may have for the current financial crisis.
I somehow doubt Bill will say anything critical or objective.
 
  • #23
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The truthful answer to your question is "nobody knows for sure".
I've been rolling the mouse around the internet and haven't come up with anything since asking, either.

Defaults leading to a chain reaction of defaults is my only guess, thus far. But the global leveraged value would be the indirect cause of geometrically compounding defaults. The the volume seems to indicate that institutions are far more leveraged in ratio to other assets.

...his guy seems well informed. A short lecture on utube on (CDS) credit default swaps.
http://www.youtube.com/watch?v=DdEI6PkGZK8"
 
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  • #24
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I've been rolling the mouse around the internet and haven't come up with anything since asking, either.

Defaults leading to a chain reaction of defaults is my only guess, thus far. But the global leveraged value would the indirect cause of geometrically compounding defaults. The the volume seems to indicate that institutions are far more leveraged in ratio to other assets.

...his guy seems well informed. A short lecture on utube on (CDS) credit default swaps.
http://www.youtube.com/watch?v=DdEI6PkGZK8"
Sometimes we tend to look in the wrong direction for an answer. We are all focused on potential losses.

Maybe the question should be "where has all of the money (made in derivatives) gone"...and when/where will it re-emerge?
 
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  • #25
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Sometimes we tend to look in the wrong direction for an answer. We are all focused on potential losses.

Maybe the question should be "where has all of the money (made in derivatives) gone"...and when/where will it re-emerge?
I'm not sure what you mean by money, or what you've noticed it decrease in it. Are you talking about M1, or M1 times the velocity?
 

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