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 a variety of financial instruments such as stocks, bonds, commodities, currencies, or market indices. The essence of derivatives lies in the relationship they have with these underlying assets, meaning that their pricing and market behavior directly reflect changes in the value of the assets on which they are based.

For instance, if you hold a derivative contract tied to a stock, any fluctuations in that stock's price will directly affect the value of the derivative. This characteristic allows investors to hedge against risks or speculate on future price movements without having to own the underlying asset directly. Understanding this foundation is key for anyone involved in equity capital markets, as it underpins many aspects of pricing and trading strategies related to derivatives.

While overall market trends, real estate performance, and interest rates impact financial markets and can influence the performance of underlying assets, they do not serve as the basis for what derivatives are fundamentally designed to represent. Instead, they are secondary factors that might affect the valuation of the underlying assets.