General Discussion
In reply to the discussion: Wait, the Derivatives market is worth $1,200 TRILLION dollars??? [View all]econoclast
(543 posts)Broadly speaking, a derivative is any financial instrument that DERIVES its value from some other, underlying financial instrument. The NOTIONAL value is just the nominal value of the underlying thing and has NO relevance to the value or risk of the derivative.
Example. Suppose you and I make a 20 dollar bet about whether or not the NY Yankees win the world series this year. Ok. How much money is at risk? 20 bucks. But, our bet is a derivative. The underlying thing is the NY Yankees. Including the YES tv network the Yanks are valued at about a billion dollars. So the NOTIONAL value of our 20 dollar bet is a cool billion!
Whenever somebody trots out the Notinal value of the Derivative market they are most likely trying to bamboozle you about something.
Which is not to say that there is not a lot of risk in the derivatives market, or that it can't get hellishly complicated. But NOTIONAL value gives no indication of how big that risk or complexity is.