Financial Derivatives Market Establishment & Implications

These derivatives derive their value from the value of the underlying asset. The underlying asset could be stocks, currencies, bonds, interest rates or commodities. In essence, these underlying assets could be divided into two categories thus financials and physicals.

All commodity derivatives have tangible underlying asset and physical settlement at maturity. Unlike commodity derivatives, financial derivatives such as stock indexes and interest rate derivatives have financial assets as underlying and are cash settled at maturity.