Question

Journalists and Politicians like to point to the trillions of dollars’ worth of notional value of derivative transactions into which large institutions enter with claims that JPM’s derivative exposure is a multiple of our GDP.  Why are such statements gross exaggerations?

Answer 1

The estimation of the 'Notional' value of the the derivatives depend on how the the 'Ntional 'value is derived.

The notional value of derivatives also includes the values of the underlying assets to which those derivatives are linked. Therefore the notional value of derivatives are mostly overestimations and does not reflect the catual market value of the derivatives contracts based on those asset.

For example the interest rate swaps , the derivative value includes a huge amount of principal amount. However, in relaity the Principal amounts do not change hands at all. The dervative traded only involves the small interest amounts which are a fraction of the total notional value.

Therfore , it is true that the estimations of notional values of derivatives are mostlt exaggerated and does not reflect the true market value of those contracts.