What are the ‘underlying’ differences in equity, commodity derivatives

Derivatives are financial instruments where the value is based on an underlying asset. That is, in derivatives market, financial instruments including futures and options, derive its price or value from an asset known as underlying. This asset can be a stock or a commodity such as gold, silver or oil. The asset can also be currencies or index. One of the differences between equities and commodities derivatives market, is this underlying. In the case of stock market, the equity futures and options have stocks as underlying and they represent the expected price of the stocks traded i.e., a measure of where the stock price might be heading to. While in case of commodities market, commodity futures and options have commodities as underlying and they represent the expected price of respective commodities traded such as gold, silver, and other metals. While the equity spot market is actively traded on a daily basis, it is not so with the commodities spot market in India.

Equity index futures and options contracts are cash settled while stock futures and options are physically settled. This is similar in commodities market as well. Commodity futures/options contracts require the trader to take physical delivery of goods, while commodities index futures/options are cash settled. For instance, MCX, one of the commodities exchanges in the country, had launched bullion index futures contract – MCX Bulldex last year. The futures contract tracks MCX iCOMDEX Bullion Index (which was launched in December 2019).

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