Derivative and asset-backed security seem to be similar, as both are based on some other assets. So I wonder if they are the same concept?

4 Answers 4


The typical distinction between a derivative and an asset-backed security is that a derivative is not direct ownership in anything, but rather is a contract who's value is derived from another security (typical examples are options and futures), whereas ABS represents a (partial) ownership stake in some real asset (such as credit card loans, mortgages, etc.).

Where this gets confusing is with collateralized debt obligations (CDOs). Technically, ordinary CDOs are not derivatives. Their value is not derived from the assets they own, their value is the assets. The similar-sounding term, CDS (credit default swap), however, is a derivative. Some banks eventually went so far as to make CDOs of CDSs, which, confusingly enough, are derivatives.

Derivatives and ABS are only related insofar as they are both complex financial products, and both played leading roles in the 2008 crisis.

  • > Some banks eventually went so far as to make CDOs of CDSs -- Synthetic CDOs
    – user20687
    Commented Aug 22, 2017 at 20:04

Without getting too deep into this, let me offer one distinction. A Billion Dollars worth of asset backed securities need to have a billion dollars of assets behind then, it's a one for one correlation. For derivatives, the same observation fails. It's said that there is well over a Quadrillion $$ of derivatives out there. In other words, even though the value of a derivative is based on something else, it's not a fixed ratio. Which is what exacerbated the CDO/CMO issue a few years back.


Just use english, derivatives are simply anything derived from an something else.

Derive means "Base a concept on a logical extension or modification of another concept."

so in this case, anything that is derived from an actual asset is a derivative.

you can have derivatives of derivatives, and so on.

"Asset Backed Security" was just a distinction created to describe some newly securitized things. But one would hope that all securities are backed some kind of asset.


Just to put things into perspective, I can create a legal derivative based on the following and many more imaginative conditions:

whether it will rain(or any vagaries of weather) or not in Georgia during the next year

whether Obama will win next year's presidential election

whether US will run a deficit of electricity in the next 10 years

best of all, whether oil prices will cross th $150 mark in the next week

I don't hold a single grain of asset, but I can create a derivative and have to find somebody to buy my option. The search of a buyer is the difficult part, but it isn't that you wouldn't be able to find one.

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