OTC Derivatives Markets: An Introduction to a 700 Trillion Dollar Markets White Paper

Author: 
Dr. Bruce Rader
Published Date: 
28 Jan 2013

One of the fastest growing segments in finance is the derivative’s markets. The Over the Counter (OTC) derivative markets are an unregulated segment of these markets.  A derivative is a security that derives its value from some other asset hence the term derivative.  These are in essence contracts on those underlying assets that trade in what is known as the cash or spot market.  The types of cash market instruments, which are the basis for derivative contracts, are extensive ranging from commodities to currencies to financial instruments. The main categories of derivatives are Forwards, Options, and Swaps.

These contracts are between individual entities and generally fall outside of a regulatory structure even thought there are usually some regulated equivalent. An example of this is that Forward Contracts are on not regulated while Futures Contracts (A refinement of the Forward Contract Concept) are regulated.  The need or existence of any derivative contract is driven by the need to reduce risk.  They are risk control instruments that allow the transfer of risk from those who wish to reduce risk (hedgers) to those who are able to bear that risk (speculators). The growth in the markets is directly related to the increase risk (volatility) in the global market in the past decades. As such derivatives are sometimes thought of as unregulated insurance markets.

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