Eli5: It’s said that the derivatives market is worth over $1,000,000,000,000,000. Where did all of this money come from?

Question

Eli5: It’s said that the derivatives market is worth over $1,000,000,000,000,000. Where did all of this money come from?

In: 5

Answer 1

It isn’t money, it is possible value.

Let’s say you have a banana stand, and you say you will give me the option to buy it from you in a month for $1000, if I pay you a dollar today. Let’s pretend I am intrigued by the idea that you might do something amazing with that banana stand so I give you a dollar.

We now have a derivative worth around a (currently functional) $1000 asset value, but only a dollar is involved.

Now imagine I tell someone else they can buy that banana stand from me in two months for $2000 if they pay me $1 today and they say ok.

We now have $3000 of assets in derivatives with only $2 actually in the mix.

We could get to big numbers pretty quickly, so keep me posted on your banana efforts.

But most likely none of us will exercise those options. Enjoy your dollar.