Underlying Asset


DEFINITION of 'Underlying Asset'

A term used in derivatives trading, such as with options. A derivative is a financial instrument whose price is based (derived) from a different asset. The underlying asset is the financial instrument (e.g., stock, futures, commodity, currency, index) on which a derivative's price is based.

BREAKING DOWN 'Underlying Asset'

For example, an option on a stock gives the holder the right to buy or sell the stock for a specified amount (strike price) at a certain date in the future (expiration). The underlying asset for the stock option contract is the company's stock.

  1. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Underlying Option Security

    An underlying option security is the financial instrument on ...
  3. Strike Price

    The price at which a specific derivative contract can be exercised. ...
  4. Gamma

    The rate of change for delta with respect to the underlying asset's ...
  5. Delta

    The ratio comparing the change in the price of the underlying ...
  6. Expiration Date (Derivatives)

    The last day that an options or futures contract is valid. When ...
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  1. Why is the initial value of a forward contract set to zero?

    Forward contracts are buy/sell agreements that specify the exchange of a specific asset and on a specific future date but ... Read Full Answer >>
  2. How do the investment risks differ between options and futures?

    Futures and options contracts are commonly used by investors who are interested in leveraging movement within the stock or ... Read Full Answer >>
  3. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  4. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  5. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  6. How do futures contracts roll over?

    Traders roll over futures contracts to switch from the front month contract that is close to expiration to another contract ... Read Full Answer >>

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