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Derivatives; A Primer.

In trying to understand derivatives and how they work, and why they have such a profound impact upon the global economy, here is what I have been able to glean so far. Please point out any discrepancies or facts that require clarification, along with any omissions. These financial instruments are difficult enough for bankers to understand let alone us lay persons. However to be fore warned is to be fore armed. 
Derivatives are financial contracts whose value is derived from the value of something else, that can be based on:
1. An asset; a/ commodities
                    b/ equities
                    c/ residential mortgages
                    d/ commercial real estate
                    e/ loans
                    f/ bonds
2. An index  a/ Interest rates
                    b/ exchange rates
                    c/ stock market indices
                    d/ consumer price index
                    e/ credit card rates
                    f/ inflation rates
3. Or "other" Items
The main types of derivatives are forwards, futures, options and swaps.
Derivatives can be used to mitigate the risk of loss, called hedging, or to speculate by investors to increase profit. Because the value of a derivative is contingent on the value of the underlying, the notional value of derivatives is recorded off the balance sheet of an institution, although the market value of derivatives is recorded on the balance sheet.
Looking at just one type of derivative called a 'fixed to floating interest rate swap', here party 'A' makes periodic interest payments to party 'B' based on a variable interest rate. Party 'B' in turn makes periodic interest payments based on a fixed rate. The payments are calculated over the notional amount, variable rate  LIBOR + 50 basis points. Fixed rate at LIBOR or reference rate. This is the extent of what my understanding of derivatives is at the moment. Reading further explanations from different sources tends to cloud the issue, which is complicated enough to understand. From my point of view as a lay person, these financial instruments would require stringent international regulation and supervision to be deemed any where near financially safe. It is no wonder that they are referred to as "toxic"!

Global notional totals outstanding as of 2006 by the Bank for International Settlements in USD trillions;
Euro                                           112.1
US Dollar                                      97.6
Japanese Yen                              38.0 
Pound Sterling                             22.3 
Swiss Franc                                   3.5
Total                                           273.5 Trillion USD

This total represents just interest rate swaps alone! The global total of OTC derivatives notional value amount as of end of 2006 was $415.2 Trillion USD!

Since then it is my understanding that this total has been added to by the very same financial institutions that got us here in the first place! How can this be? What is the up to date amount now? Can these astronomical amounts be dealt with in a financially sound manor without blowing up in our collective faces?

Disclosure: No position