Underlying Asset

Underlying assets are the assets that are used in the derivative trading where the trading done with a number of options. A derivative can be defined as a financial instrument that has a price which is based on a different asset or the price is derived by a different asset. The underlying asset can also be defined as a financial instrument that is derived from different sources. The example of the underlying asset can be presented as stocks, futures, commodities for trading, currency and index. These are the all kinds of assets on which the price of the derivative depends.

For example assume a person ABC purchases a stock with an option. The stock with an option allows the stock holder to sell or purchase the stock at a specified price. This specified price is called the strike price and it has a certain date in the future. This date can be termed as the expiration date of the stock that is sold or purchased by the stock holder. The underlying asset for a stock option contract can be defined as the company’s stock.

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