Underlying

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Underlying

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

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.
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Until such time as payment of interest is resumed and all capitalized and deferred interest is paid in cash in accordance with the terms of the underlying instruments, deferring PIK assets are carried at the lesser of fair market value and the assigned recovery rate.
The collateral asset in question may not actually be in default under the terms of the underlying instrument. Nonetheless, the asset is highly unlikely to provide the ongoing interest and/or principal payments necessary to fund the CDO's liabilities.
Structural and collateral considerations
If the underlying instruments are government bonds, your money is safe, but if these are, say, a bond issued by a real estate firm, then the guarantee is as good as the firm's credit.
CAPITAL SAFETY, MODEST RETURNS
Market risk would be assessed on a portfolio basis, taking into account the cash flows associated with both derivatives and the underlying instruments.
Statement by Susan M. Phillips, Member, Board of Governors of the Federal Reserve System before the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, October 28, 1993
For newcomers to the field, a derivatives instrument is a bilateral contract or payments-exchange agreement whose value is measured by the value of one or more underlying instruments, reference points or markets.
Derivatives - power tools for pension funds
In light of the strong linkages among the markets for futures, options, and their underlying instruments, some have argued that the division of oversight responsibilities among agencies may impede the effective regulation and supervision that is essential to ensure sound and efficient financial markets.
Statements to the Congress

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