Underlying assets

What is the underlying asset?

In a derivatives transaction, the underlying asset is the asset that is assigned the value of the derivative, the value of the derivative, and the value of the derivative. Derivatives the financial instrument represented.

The underlying asset usually takes the form of a stock or commodity form, but can also be any asset that provides value

Where have you heard about the underlying asset?

You may not have heard much about the general concept of the underlying asset, but you have certainly heard about the various specific forms of the underlying asset. For example, stocks, commodities, futures even currency is the most common form of underlying asset today.

Information you need to know about the underlying asset...

An example of an underlying asset is a stock option transaction.

Options give traders the right to buy shares of X. In a stock option, the underlying asset is the stock itself because it is the financial instrument that gives the option value. Without the underlying asset, the derivative has no intrinsic value.

Another example is futures trading. A futures trader buys or sells a contract that promises to deliver the underlying asset on a specified future date.

In Contract for Difference (CFD) trading, profit or loss depends on the price movement of the underlying asset relative to the position held, but the trader never actually buys or sells the underlying asset.

Over time, the value of the underlying asset rises or falls, thereby changing the value of the option. Determining whether a derivative is a favorable investment depends on the potential change in the value of the underlying asset.