Underlying Asset

An underlying asset is the real financial item that a derivative or financial contract is based on. For example, in a stock option, the underlying asset is the actual company’s stock. The value of the derivative depends on the price or performance of this underlying asset. It can be various assets like stocks, commodities, currencies, or indices. Essentially, the underlying asset provides the foundation for the derivative’s value, allowing investors to hedge, speculate, or gain exposure to the asset’s movement without directly owning it.