fuse lit on jpms $trillion interest rate swaps, page-24

bollinger

"No of the players have assets to back their exposure."

That is incorrect, because you assume that the notional asset value is the same as exposure. It isn't. Exposure on a futures contract or OTC derivative is the potential change in price. You cannot trade futures or swaps unless you have assets (usually cash) as deposit or margin to cover exposure to adverse price shifts.

The whole point of a derivative is to create the exposure to price movements on a particular asset, without having to buy or sell the asset itself. If you think that the price of gold is going to rise 10%, why spend $1560 an ounce to make $156 buying the physical when you can post collateral of $176 and make the same amount on a futures contract? (The return on capital on the futures contract is vastly higher, which explains why futures and OTC derivatives are so popular.)

As I have said elsewhere, the gold futures market is made up of traders selling gold they haven't got, to buyers who don't have the money to pay for it. It is an elegant alternative to passing around heavy bars that might have tungsten in them.

Cheers