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.

According to the Financial Accounting Standards Board's FASB Statement of Financial Accounting Standards No. 133 (FAS 133) - Accounting for Derivative Instruments and Hedging Activities, an underlying is a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable (including the occurrence or nonoccurrence of a specified event such as a scheduled payment under a contract). An underlying may be a price or rate of an asset or liability but is not the asset or liability itself.

Read more about Underlying:  Examples

Other articles related to "underlying":

... It can be used to get a description of the underlying shape ... It encodes the underlying shape by accumulating local energy of the underlying signal along several filter orientations, several local histograms from different parts of the image/patch ...
Underlying - Examples
... example, in a stock option to buy 100 shares of Nokia at EUR 50 in April 2011, the underlying is a Nokia share ... to buy EUR 10 million 10 year German Government Bonds, the underlying are the German Government bonds ... Industrial Average and Nikkei 225, for which the underlying are the common stocks of 30 large U.S ...
Synthetic Position
... A synthetic position can be created by buying or selling the underlying financial instruments and/or derivatives ... instruments which have the same payoff as investing in a share, you have a synthetic underlying position ... put) will always result in purchasing the underlying asset for 60 at exercise or expiration ...
Message Abstraction Layer - Disadvantages
... The MAL will not support features of the underlying protocol beyond the "least common denominator" defined in the MAL ... to a simpler subset that represent the intersection of all of the underlying middleware options ... However, feature of an underlying protocol may be selected through configuration ...
Marcellus Formation - Geology - Stratigraphy - Underlying
... The Milboro is gradational with the underlying Needmore Formation shale ... classification is now obsolete but its Marcellus and underlying Needmore shale members are still found grouped in an undifferentiated map unit (Dmn) ...

Famous quotes containing the word underlying:

    The welfare, the happiness, the energy and spirit of the men and women who do the daily work ... is the underlying necessity of all prosperity.... There can be nothing wholesome unless their life is wholesome; there can be no contentment unless they are contented.
    Woodrow Wilson (1856–1924)

    Comedy deflates the sense precisely so that the underlying lubricity and malice may bubble to the surface.
    Paul Goodman (1911–1972)

    The “female culture” has shifted more rapidly than the “male culture”; the image of the go-get ‘em woman has yet to be fully matched by the image of the let’s take-care-of-the-kids- together man. More important, over the last thirty years, men’s underlying feelings about taking responsibility at home have changed much less than women’s feelings have changed about forging some kind of identity at work.
    Arlie Hochschild (20th century)