Wednesday, October 12, 2016

Warren Buffett once described derivatives as “weapons of financial mass destruction,” and after the 2008 financial crisis, we can’t really dispute that claim—but derivatives do serve plenty of useful purposes, too. They can hedge against foreign exchange rates (see our post on that from a few weeks ago), or volatile fuel prices, interest rates, and so forth.

The accounting for hedging can be very complicated, with lots of estimations for what the fair value of a derivative is. The value of derivatives can also stack up quite a bit on the balance sheet. How high? Well, we looked at the total and average fair value of derivative assets and liabilities reported by the S&P 500 over the last five years. We have two charts for you.

Figure 1, below, shows the total value of derivative assets and liabilities, 2011 to 2015. As you can see, they fluctuate from $5 trillion to $3 trillion, although assets usually exceed liabilities.

Figure 2, below, shows the average per filer. Same rough pattern, although this time across a wider range of $18 billion to $9 billion.

You can run similar analyses from our Data Query page, across larger populations of companies, industry sectors, or peer groups you build yourself. Then just look for derivatives among the many footnotes that Calcbench tracks in our databases, and you’re off to the races.

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