Lesson 3 of 5 · 15 min
Derivative underlyings: equities, rates, currencies, commodities, credit
Derivatives are grouped by what they reference, and each family of underlyings serves typical users: investors reshaping portfolios and issuers or producers managing business risks.
In short
- The most common underlyings are equities, fixed income and interest rates, currencies, commodities and credit; one contract can reference more than one.
- Equity derivatives reference single stocks, groups of stocks or indexes; equity (index) swaps exchange one index return for another return; volatility contracts trade dispersion separately from direction; stock options and warrants are used by issuers.
- Bond futures often allow several bond issues to be delivered. Interest rate swaps convert fixed to floating exposure; the usual floating underlying is a market reference rate (MRR) such as SOFR, €STR or SONIA.
- Currency derivatives hedge foreign exchange risk in trade and investment.
- Commodities split into soft (agricultural) and hard (natural resources); credit derivatives such as credit default swaps (CDS) reference default risk. Other underlyings include weather, cryptocurrencies and longevity.
Unlock this lesson free for 7 days
Create a free account to get 7 days of full access — every lesson, video, flashcard, mock and the question bank. No card needed.