The derivatives market is, in a word, gigantic—often estimated at over $1 quadrillion on the high end. How can that be? Largely because there are numerous derivatives in existence, available on virtually every possible type of investment asset, including equities, commodities, bonds, and currency. Some market analysts even place the size of the market at more than 10 times that of the total world gross domestic product (GDP). However, other researchers challenge these estimates, arguing the size of the derivatives market is vastly overstated.

Key Takeaways The derivatives market is said to be over $1 quadrillion dollars on the high end, but some analysts say the market is grossly overestimated.

The higher end of the estimates includes the notional value of derivative contracts.

There is a large difference in the notional value and actual value of derivatives—$640 trillion versus $12 trillion—as of the first half of 2019.

The Range of Estimates

Determining the actual size of the derivatives market depends on what a person considers part of the market, and therefore, what figures go into the calculation. The larger estimates come from adding up the notional value of all available derivatives contracts. But some analysts argue that such a calculation doesn't reflect reality—that the notional value of a derivative contract's underlying assets, the financial instruments the derivative is pegged to, does not accurately represent the actual market value of derivative contracts based on those assets.

Derivatives themselves merely contracts between parties; they are speculations, bought, or sold as bets on the future price moves of whatever securities they're based on—hence the name 'derivative.' So derivatives' prices are dependent on the prices of their underlying assets.

An example that illustrates the vast difference between notional value and actual market value can be found in popularly traded derivatives, interest rate swaps. The large principal amounts of the underlying interest rate instruments, although usually included in the calculation of total swaps value, never actually trade hands. The only money traded in an interest rate swap is the vastly smaller interest payment amounts—sums that are only a fraction of the principal amount.

Current Derivatives Market

According to the most recent data from the Bank for International Settlements (BIS), for the first half of 2019, the total notional amounts outstanding for contracts in the derivatives market was an estimated $640 trillion, but the gross market value of all contracts to be significantly less: approximately $12 trillion.

The OTC derivatives market, on a notional value, is at its highest level since 2014. Interest rate derivatives make up for the majority of the OTC notional derivative value. The notional value of interest rate contracts is nearly $200 trillion. Meanwhile, the gross value of derivatives has been falling in recent years but rebounded in 2019.

The Bottom Line

When the actual market value of derivatives (rather than notional value) is the focus, the estimate of the size of the derivatives market changes dramatically. However, by any calculation, the derivatives market is quite sizable and significant in the overall picture of worldwide investments.