In finance, the underlying of a derivative is an asset, basket of assets, index, or even another derivative, such that the cash flows of the (former) derivative depend on the value of this underlying. There must be an independent way to observe this value to avoid conflicts of interest.

For example, in a stock option to buy 100 shares of Nokia at EUR 50 in September 2006, the "underlying" is a Nokia share. In a futures contract to buy EUR 10 million 10 year German Government Bonds, the "underlying" are the German Government bonds. Other examples are stock market indexes such as the Dow Jones Industrial Average and Nikkei 225.

Fixed-income derivatives are an example of derivatives whose underlying is also a derivative. For example, Euro-Bund options (OGBL) are traded on Eurex and their underlying is the Euro-Bund futures contract (FGBL).

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  • underlying — or underlier An option or a future is a right or a commitment to buy or sell something at a future date. The underlying is the financial instrument that may or must be bought or sold in each option or futures contract. FAS 133, as amended by FAS… …   Financial and business terms

  • underlying — un der*ly ing, a. 1. Lying under or beneath; as, the underlying strata of a locality. [1913 Webster] 2. Hence: Fundamental; basic; as, underlying principles; underlying causes. [1913 Webster +PJC] 3. Implicit; not immediately obvious; requiring… …   The Collaborative International Dictionary of English

  • underlying — I adjective based on, basic, built on, deep rooted, elemental, elementary, essential, fundamental, latent, not evident, obscure, original, primal, primary, rudimentary, supporting, undermost, unseen associated concepts: underlying contract,… …   Law dictionary

  • underlying — [un′dərlī΄iŋ] adj. 1. lying under; placed beneath 2. fundamental; basic [the underlying cause] 3. really there but not easily seen or noticed [an underlying trend] 4. Finance having priority, as a claim …   English World dictionary

  • underlying — adjective be the cause or basis of. → underlie underlying present participle of underlie …   English new terms dictionary

  • Underlying —   [ ʌndəlaɪiȖ, englisch], Basiswert, Optionsgeschäft …   Universal-Lexikon

  • underlying — basic, *fundamental, basal, radical Analogous words: *essential, cardinal, vital, fundamental: requisite, indispensable, necessary, *needful …   New Dictionary of Synonyms

  • underlying — [adj] fundamental, latent basal, basic, bottom, bottom line*, cardinal, concealed, critical, crucial, elemental, elementary, essential, hidden, indispensable, intrinsic, lurking, necessary, needful, nitty gritty*, nub, primary, prime, primitive,… …   New thesaurus

  • Underlying — The something that the parties agree to exchange in a derivative contract. The New York Times Financial Glossary * * * underlying un‧der‧ly‧ing [ˌʌndəˈlaɪ ɪŋ◂ ǁ ər ] adjective 1. underlying figure/​rate ECONOMICS a rate or figure that shows the… …   Financial and business terms

  • underlying — un|der|ly|ing [ ,ʌndər laııŋ ] adjective only before noun ** 1. ) underlying causes, facts, ideas, etc. are the real or basic ones, although they are not obvious or directly stated: The underlying causes of the riots have been ignored. While… …   Usage of the words and phrases in modern English