During the past 18 months, the world has felt the impact of derivatives on financial markets. Many businesses have for years used derivative contracts such as currency or interest rate swaps or forward contracts for the purchase of oil, gold, natural gas, wheat or other commodities to hedge their exposure to an unexpected rise or fall in values, interest rates or prices. However, the scope and extent of trading in derivative instruments exploded during the past 10 years, causing profound effects on the world’s financial markets.
In fact, the Bank for International Settlements, the central bankers’ bank located in Basel, Switzerland, estimated that the total notional value of global derivative contracts had risen to $516 trillion as of June 2007, just before the failure of two Bear Stearns hedge funds signaled the beginning of the current financial crisis.
