Underlying

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.

Notes:

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).

See also: Call Option, Conversion Price, Convertible Bond, Convertible Preferred Stock, Derivative, In the Money, Option, Put Option, Strike Price, Warrant

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Underlying

What supports the security or instrument that parties agree to exchange in a derivative contract.