Derivatives is a group of exploitative financial instruments named thus because they derive their speculative value from actual value in the real world. By determining a related variable correctly – climatic factors, currency movements, interest rates, unemployment rates, trends of future national budgets, outcome of elections, Steve Job’s health, etc. – the buyer of a future contract may profit from his or her investment.
Why would anyone sell a future contract then, if the profit is to be had by purchasing it? Take futures, one very popular form of derivatives. By entering into a future contract, a farmer, let’s say, and a purchaser agree on a price before the actual harvesting and delivery take place. Such an arrangement guarantees the farmer some sort of stability, while the purchaser gambles on a rise in the price of the commodity purchased. Honest, hard-working producers of the real economy still value stability and security, while exploitative speculators of the unreal economy just don’t care about anything else but siphoning off profits.
Debt is another example of the real world turned unreal. Once upon a time debt was something between you and the bank. Today debt is just another speculative commodity. Profit-motivated traders just cannot get enough of this kind of speculative, virtually potential wealth, and so they go on creating new derivatives, putting them on their gigantic global gambling table:
- In 2008, the total world derivatives market was 11 times the size of the entire world economy, estimated at about $791 trillion (1 trillion = 1000 million) face or nominal value, according to Wikipedia.
- In 2010 the US derivatives market was 20 times bigger than the country’s production of goods and services, according to a Futures Mag report.
- 2010 was a record year for the global futures market with a 25% increase and more than 22 bn contracts, while trading in commodity derivatives alone rose 34% (the Chinese took more than half of it), according to The World Federation of Exchanges.
- 25 years ago the European derivatives market was small and domestic. It has grown around 24 per cent per year in the last decade. No other class of financial instruments has experienced as much innovation, Deutsche Bank says in a recent white paper.