Frequently Asked Questions - Financial Derivatives
This is a selection of the most frequently asked questions along with answers. The contents will be updated on an ongoing basis.
Financial Derivatives: If you require any further assistance
on this subject contact us
Q. Can changes in business volumes be measured from
the series on financial derivatives?
A. The aggregate figures for banks’ gross positions are
at market values. This means that there are both volume and
price factors affecting the published aggregates. Unfortunately
it is not possible to identify changes in volumes of the range
of derivatives products for which gross data are compiled and
published.
Q. Are data available on derivatives contracts in terms
of the underlying nominal values?
A. Banks report a single figure for all derivatives contracts
outstanding by nominal value, converted into sterling, without
any breakdown of product and / or risk type. Users who wish
to assess the growth of derivatives usage, in nominal terms,
are recommended to access the information on global OTC derivatives
published by the Bank for International Settlements.
Q. Is there any simple explanation for the apparent
volatility over time of the derivatives totals by product type?
A. The published data on banks’ gross positions since
1998 reveal underlying growth trends, notably in options and
swaps. Part of the answer to the fluctuations observed over
the shorter term may be that some of the trading stimulus in
derivatives markets is connected to the general degree of uncertainty
in financial markets. When exchange rates and/or official interest
rates are significantly stable, anecdotal information suggests
that there is less need, per se, to enter into hedging or other
trading strategies. Conversely, when markets are volatile, and
there is a lack of market consensus as to future trends, there
is scope for maximising future profit opportunities out of increased
derivatives activity when spreads are widening.
The contrast between peaks and troughs in market values may
be exacerbated to some extent by the nature of OTC derivatives.
A trader who seeks to match or offset an exposure represented
by an existing OTC contract will engage in further OTC contracts
in order to transfer the risk.
