Underlying Asset  

Underlying asset is a financial instrument that is the underlying source of derivative prices. The change in the value of the underlying asset will have a direct or indirect impact with the price of the derivative referenced from that asset.

How can I differentiate between an underlying asset and a derivative?

Most of the financial instruments that will be the underlying asset are those that require full settlement of the asset’s value. In other words, it will be traded in cash for the full value of the asset. and can be distinguished from the place of trading. Derivatives are usually traded in specific markets such as futures markets, over-the-counter markets.

Underlying assets such as stocks, bonds, Exchange Traded Funds (ETFs), indices, currencies, commodities (precious metals, agricultural commodities, oil) and others.

Example of using an underlying asset

The most widely known of the underlying assets are stocks, where stocks are used as the underlying asset of the option, forming a financial product called Stock Option, such as Tsla stock options, AAPL stock options. The option value of such stocks will increase or decrease according to the change in value of Tesla and Apple shares.

Or the precious metal known as Safe Haven, like gold, is used as the underlying asset of futures contracts. The result is a financial product called Gold Futures, which is traded on the Futures Market based on the price of the Gold Spot.