Underlying instrument

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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.

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.

References in periodicals archive ?
They are less liquid; electricity markets and electric utilities must follow different rules in every state; and the underlying commodity, electricity, cannot be stored.
The value of that contract is dependent on--or derived from--the price of the underlying commodity, in this case electricity.
Options require less initial cash outlay than buying the underlying futures contract would, but they can be much more volatile.
Anyone can speculate in oil or gas, store the underlying commodity and sell it at a more auspicious time.
Although the derivatives themselves are not regulated, the Federal Energy Regulatory Commission monitors underlying transactions that involve actual power delivery, such as those traded on the California Power Exchange (CalPx) a market California devised for trading electricity in-state when it began deregulating.
If the hedge goes in the money and the underlying commodity [goes] dear, you look great," Lifson says.
call (option) A call allows an investor to buy a futures contract or other underlying commodity at a specific price for a limited time.
derivative A financial instrument that is contingent on the price of an underlying commodity, in this context, electricity.
embedded derivative A derivative implied by a contract such as a bond, insurance policy or lease that is contingent on an underlying commodity but is not itself a derivative.
long An investment is long if the investor makes money when its price or the price of an underlying commodity rises.
put (option) In this context, an agreement allowing an investor to sell a futures contract or other underlying commodity at a specific price for a limited time.