How Much Is The Derivatives Bubble

Many people want to know how much is the derivatives bubble. The term "derivatives" is a blanket term for financial vehicles used to hedge investments. To understand how much is the derivatives bubble, you have to understand that the derivative is based on underlying financial instruments. These instruments can range from types of assets such as commodities, equities (stocks), bonds, interest rates, exchange rates, or indexes (such as a stock market index, consumer price index (CPI), other derivatives, and even weather conditions. There really is no limit to derivative instruments.

The main use of a derivative is simply hedging. Here's a simple scenario: Let's say you buy a television set for $500, but you hear there may be a sale on the same model at another store in a few weeks. You also have a friend who wants to buy your television. So, you buy the set with a zero-interest credit card and a 30-day return policy. The new store places the television set on sale for $400. You can now buy that set and either a) sell the set to your friend for $500; or, b) return the television set for a refund.

You, in effect, have engaged in derivatives trading by hedging the purchase of your television set purchase through the use of options. Now, in the financial markets, the monetary amounts are much, much, higher than this example and it leads people to ask how much is the derivatives bubble. There's more than $500 trillion dollars in the derivatives market.

But this doesn't mean that someone should ask how much is the derivatives bubble. While trillions of dollars are traded each day, some critics say these derivatives are too much and too risky. Other proponents say that derivatives offer the economy more flexibility and innovation, increasing wealth for everyone.

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