of products, including options on futures, a derivative with another
derivative as the underlying. Although options have been trading
on exchange for a shorter time than futures, they are nevertheless
extremely popular with both hedgers and speculators alike.
The Australian Options Market (now owned by the Australian Stock
Exchange) opened in 1976. In 1978, the first traded options markets
started trading in Europe. The European Options Exchange opened in
Amsterdam followed soon after by the London Traded Option Market
(now owned by the LIFFE).
Other futures and options markets followed. The London Inter-
national Financial Futures & Options Exchange opened for business
in 1982, the Singapore International Monetary Exchange in 1984
and the Hong Kong Futures Exchange in 1985. Many new markets in
the Americas, Europe and the Far East followed these during the late
1980s and the early 1990s.
Today, as we have already noted, the derivatives industry is truly
global. To illustrate just how big the industry is we only need to look
at the volume of contracts traded on worldwide derivatives exchanges
during 2003, which totalled a staggering 8 billion-plus contracts.
We must also take into account the derivatives business that is not
traded on exchanges. In 2003, the market in the interest rate seg-
ment of OTC derivatives was estimated by the Bank for International
Settlements (BIS) to be valued at $142 trillion.
Over-the-counter derivatives tend to be more specialised products
that are negotiated and very much tailored to the user’s require-
ments. Swaps, forwards and forward rate agreements (FRAs) are
traded over-the-counter and so too are many different types of
options making the combined on- and off-exchange volume of busi-
ness in options massive.
The industry, both exchange-traded and OTC, continues to grow
with new exchanges and new products providing users with the
medium to control risk.
More recently, products introduced on- and off-exchange include
credit derivatives, weather derivatives, share futures, flex options and
‘mini’ (smaller contract size than the standard futures contract) con-
tracts on, for instance, various equity indices.
As the table of the world’s leading exchanges (Table 1.1) and the
graph of OTC values (Table 1.2) illustrates, today the derivatives
industry is truly global and also enormous. Equally it is a diversified
industry as the following list of the 20 highest volume contracts in
the first half of 2004 shows (Table 1.3).
Development of futures, options and OTC derivatives 7