In financial terms, what do derivatives typically relate to?

Derivatives are financial instruments whose value is derived from the performance of an underlying asset, index, or rate. These underlying entities can include a wide range of instruments such as stocks, bonds, commodities, currency pairs, and interest rates. Because derivatives are contracts that derive their value from these underlying assets or financial instruments, they are used in various financial strategies, including risk management and hedging.

Understanding this characteristic of derivatives clarifies why they are closely related to a broad spectrum of financial instruments rather than being limited to specific categories like physical assets or government bonds. This versatility allows investors and companies to manage exposure to various risks associated with the underlying assets more effectively.

In contrast, derivatives are not solely there for speculative purposes, although they can certainly be used that way. They also serve important functions in practical financial operations. Additionally, the notion that derivatives apply only to physical assets or certain types of bonds is too restrictive and does not encompass the full range of derivatives available in the market.