An underlying market is the market on which a derivative is based.
This might also be called an underlying asset.
You can trade derivatives contracts based on many underlying markets, from commodities such as oil and gold, to stock indices, to spot forex.
Derivatives are financial instruments where the value is based on an underlying asset.
These are some examples of underlying assets that might be used in trading:
Underlying markets don’t always have to be based on individual assets like these. They might be based on futures contracts or any other market offered by an exchange or trading provider.
Examples of underlying markets include:
- Spot forex
- Stock index futures
- Commodities futures
How do underlying markets and assets relate to derivatives?
The price movement of the underlying market also affects derivatives that are based on it.
For example, if the spot price of EUR/USD goes up, the value of a derivative based on EUR/USD would also tend to go up.
This specific derivative is usually either a CFD or a rolling spot FX contract.
The exact nature of the relationship between a contact and its underlying market will depend on the derivative itself.