Citigroup Inc, one of the largest American multinational banking and financial corporations, is currently increasing their derivate trades.
Citigroup's derivative portfolio has increased by 69 percent in the last five years. Currently, the group holds around $62 trillion in open contracts compared to its $37 trillion last June of 2009.
The company's derivative portfolio is still expanding and has done a lot of interest rate swaps. This swap is a derivative product which involves an underlying bet on the central bank's interest rates. According to Citigroup's CEO Michael Corbat, the company expanded its derivative portfolio to meet client's growing demand.
Derivative products involve payments from counterparties based on the value of underlying interest bonds, currencies, commodities, interest rates or stocks. Derivatives can be used by the client to repackage price contracts, offset market swings and volatility, insure against a default and also for price speculation. There is a big risk involved such as in cases of counterparty default.
The percentage of earnings from derivatives trading is unclear but arodetivund 20 percent of the bank's fixed income revenue is from derivative trading flows linked to currencies, interest rates and corporate credit.
Bank regulators are now requiring extra capital on the bank's books for derivatives trading.
Banks who are also increasing in open derivative trades are Goldman Sachs Group Inc, Bank of America and Morgan Stanley with amounts of $58 trillion, $ 55 trillion and $44 trillion respectively.
In the global finacial crisis last 2008, Citigroup suffered a huge loss and was bailed out by the United States government to prevent bankruptcy. At that time, the government will take a 36 percent equity stake of the group by converting the emergency aid amounting to $25 billion into common stock. The U.S. government guaranteed Citibank's losses of around $300 billion in assets guarantees and provided $20 billion as capital injection to the company. By December 2010, Citibank eventually repaid the government in full.
