An Underlying Asset is the financial instrument or physical commodity that serves as the basis for a derivative contract. A derivative is a financial contract that derives its value from an underlying asset, such as a stock, bond, commodity, or currency.The underlying asset determines the value of the derivative and provides a level of stability and predictability to the derivative's value. The price of the derivative is directly tied to the price of the underlying asset. If the price of the underlying asset rises, the value of the derivative will also rise, and vice versa.Derivatives can be used for a variety of purposes, such as hedging risk, speculating on market movements, or generating income. They are often used by investors and financial institutions to manage their exposure to market risk.Examples of underlying assets for derivatives include stocks, bonds, commodities, currencies, and indices.For example, a stock option is a derivative that derives its value from a specific stock. If the stock price rises, the value of the stock option will also rise, and vice versa.In conclusion, an underlying asset is the financial instrument or physical commodity that serves as the basis for a derivative contract. The price of the derivative is directly tied to the price of the underlying asset, and derivatives are often used by investors and financial institutions to manage their exposure to market risk. Examples of underlying assets for derivatives include stocks, bonds, commodities, currencies, and indices.
