DEFINITION of 'Underlying'

1. In derivatives, the security that must be delivered when a derivative contract, such as a put or call option, is exercised.

2. In equities, the common stock that must be delivered when a warrant is exercised, or when a convertible bond or convertible preferred share is converted to common stock.

BREAKING DOWN 'Underlying'

The price of the underlying is the main factor that determines prices of derivative securities, warrants and convertibles. Thus, a change in an underlying results in a simultaneous change in the price of the derivative asset that is linked to it. In most cases, the underlying is a security such as a stock (in the case of options) or a commodity (in the case of futures).

  1. Derivative

    A security with a price that is dependent upon or derived from ...
  2. Full Value

    The total worth of a financial instrument or organization. Full ...
  3. Convertible Preferred Stock

    Preferred stock that includes an option for the holder to convert ...
  4. Convertible Bond

    A bond that can be converted into a predetermined amount of the ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  6. Conversion Price

    The price per share at which a convertible security, such as ...
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