The Block
Derivatives contracts in crypto trading are investments that get their values based on an underlying cryptocurrency, such as bitcoin or ether. These contracts allow traders to speculate on the cryptocurrency’s price movements without owning the asset directly. Common types of crypto derivatives include but are not limited to futures and perpetual contracts…….Continue reading….
By: MK Manoylov
Source: The Block
.
Critics:
The derivatives market is the financial market for derivatives – financial instruments like futures contracts or options – which are derived from other forms of assets. The market can be divided into two, that for exchange-traded derivatives and that for over-the-counter derivatives. The legal nature of these products is very different, as well as the way they are traded, though many market participants are active in both. The derivatives market in Europe has a notional amount of €660 trillion.
Participants in a derivative market can be segregated into four sets based on their trading motives. Futures exchanges, such as Euronext.liffe and the Chicago Mercantile Exchange, trade in standardized derivative contracts. These are options contracts, swaps contracts and futures contracts on a whole range of underlying products. The members of the exchange hold positions in these contracts with the exchange, who acts as central counterparty.
When one party goes long (buys a futures contract), another goes short (sells). When a new contract is introduced, the total position in the contract is zero. Therefore, the sum of all the long positions must be equal to the sum of all the short positions. In other words, risk is transferred from one party to another is a type of a zero sum game. The total notional amount of all the outstanding positions at the end of June 2004 stood at $53 trillion.
Tailor-made derivatives, not traded on a futures exchange are traded on over-the-counter markets, also known as the OTC market. These consist of investment banks with traders who make markets in these derivatives, and clients such as hedge funds, commercial banks, government-sponsored enterprises, etc. Products that are always traded over-the-counter are swaps, forward rate agreements, forward contracts, credit derivatives, accumulators etc.
OTC Markets are generally separated into two key segments: the customer market and the interdealer market. Customers almost exclusively trade through dealers because of the high search and transaction costs. Dealers are large institutions that arrange transactions for their customers, utilizing their specialized knowledge, expertise, and access to capital. In order to hedge the risks incurred by transacting with customers, dealers turn to the interdealer market, or the exchange-traded markets. Dealers can also trade for themselves or act as market makers in the OTC market.
The derivative markets played an important role in the financial crisis of 2007–2008. Credit default swaps (CDSs), financial instruments traded on the over the counter derivatives markets, and mortgage-backed securities (MBSs), a type of securitized debt were notable contributors. The leveraged operations are said to have generated an “irrational appeal” for risk taking, and the lack of clearing obligations also appeared as very damaging for the balance of the market.
More specifically, interdealer collateral management and risk management systems proved to be inadequate. The G-20’s proposals for financial markets reform all stress these points, and suggest: Higher capital standards, Stronger risk management, International surveillance of financial firms’ operations & Dynamic capital rules.
Kraken Secures MiFID License, Boosts EU Crypto Derivatives Presence
Leave a Reply