What are derivatives primarily based on?

Derivatives are financial instruments whose value is derived from the performance of underlying assets. These underlying assets can include stocks, bonds, commodities, currencies, or market indexes. The primary function of derivatives is to provide a means for investors to hedge against risks or to speculate on the future price movements of these assets.

By basing their value on underlying assets, derivatives allow participants to gain exposure to price changes without necessarily owning the assets themselves. This can be advantageous for various strategies, whether for risk management purposes or to leverage positions in the market. Understanding this fundamental nature of derivatives is crucial for anyone working in the financial sector, as it demonstrates how these instruments operate within the broader market landscape.

Other options, while related to financial concepts, do not encapsulate the core foundation of derivatives. For instance, interest rates may influence some derivatives, but they do not define them. The performance of mutual funds and discounts on securities also do not serve as the base for derivatives, further reinforcing that the value derived from underlying assets is what fundamentally characterizes them.