Underlying instrument

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Related to Underlying instrument: Financial derivatives

Underlying Instrument

A security, commodity, or other asset described in a derivative contact. For example, in an option contract giving the holder the right to buy so many shares of AT&T, the underlying instrument is stock in AT&T. Likewise, in a futures contract on so many barrels of refined oil, the underlying instrument is refined oil.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

Underlying instrument.

An underlying instrument is a security, such as a stock, a commodity, or other type of financial product, such as a stock index, whose value determines the value of a derivative investment or product.

For example, if you own a stock option, the stock you have the right to buy or sell according to the terms of that option is the option's underlying instrument.

Underlying instruments may also be called underlying products, underlying interest, or sometimes the underlying investment.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
While it focused on the valuation of a financial option, Black and Scholes (1973) also discuss using this methodology on real assets as the underlying instrument. Specifically, they suggest that the equity of a firm be considered a call option on the assets of a firm, with the debt being the strike price.
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