Let's dive into the world of derivatives, beginning with a foundational understanding of what they are. Imagine a derivative as a specialized financial agreement, the value of which is linked to something else known as the underlying. The underlying on a derivative could be an asset from a traditional asset class like bonds or interest rates, stocks, and credits equally possible in the derivatives market as an underlying are currencies and commodities, but there's lots more. In recent years, the realm of derivatives has expanded to cover many other market elements such as inflation and volatility. To grasp the sheer magnitude of the derivatives market, let's draw a comparison with the combined size of the stock and debt markets. In 2022, the global public equity market was worth 101 trillion US dollars, and the global public debt market was $235 trillion. In contrast, the global OTC or over the counter derivatives, notional amounts outstanding, which measures the size of derivative contracts in existence, was 618 trillion US dollars more than the public equity and debt markets combined.

Now, this isn't a perfect parallel since the OTC derivatives market includes a myriad of products like commodities and foreign exchange, and also the notional amounts related to derivatives don't represent direct monetary investments. Nevertheless, this comparison is quite telling of the scale at which the derivative market operates.