BROWSE

Underlying Security

What is an 'Underlying Security'

An underlying security is the security on which a derivative derives its value. For example, a call option on Google stock gives the holder the right, but not the obligation, to purchase Google stock at the price specified in the option contract. In this case, Google stock is the underlying security.

Explaining 'Underlying Security'

In derivative terminology, the underlying security is often referred to simply as "the underlying." An underlying security can be any asset, index, financial instrument or even another derivative. Generally, an underlying security's value should be independently observable by both parties, so that there is no potential for confusion regarding the value of the derivative. Investors dealing in derivatives must closely research the underlying security in order to ensure that they fully understand the factors affecting the value of the derivative.


Further Reading


Approximate option valuation for arbitrary stochastic processes
www.sciencedirect.com [PDF]
… boundary conditions for call and put option prices when the underlying security pays dividends … of Some New Results in Financial Option Pricing Theory,” Journal of Finance, 31, 383 … RC, (1973), “Theory of Rational Option Pricing,” Bell Journal of Economics and Management …

Design of underlying security system on rural contracted land use right——taking the West of Chongqing district as an example <span style=[J]' src='/thumbnails/?img=http%3A%2F%2Fen.cnki.com.cn%2FArticle_en%2FCJFDTotal-GDNY201114081.htm' />Design of underlying security system on rural contracted land use right——taking the West of Chongqing district as an example [J]
en.cnki.com.cn [[J]' href='https:/api.miniature.io/pdf?url=en.cnki.com.cn%2FArticle_en%2FCJFDTotal-GDNY201114081.htm'>PDF]
… boundary conditions for call and put option prices when the underlying security pays dividends … of Some New Results in Financial Option Pricing Theory,” Journal of Finance, 31, 383 … RC, (1973), “Theory of Rational Option Pricing,” Bell Journal of Economics and Management …

Efficient Monte Carlo barrier option pricing when the underlying security price follows a jump-diffusion processEfficient Monte Carlo barrier option pricing when the underlying security price follows a jump-diffusion process
jod.pm-research.com [PDF]
… boundary conditions for call and put option prices when the underlying security pays dividends … of Some New Results in Financial Option Pricing Theory,” Journal of Finance, 31, 383 … RC, (1973), “Theory of Rational Option Pricing,” Bell Journal of Economics and Management …

Option initiation and underlying market behavior: Evidence from NorwayOption initiation and underlying market behavior: Evidence from Norway
search.proquest.com [PDF]
… boundary conditions for call and put option prices when the underlying security pays dividends … of Some New Results in Financial Option Pricing Theory,” Journal of Finance, 31, 383 … RC, (1973), “Theory of Rational Option Pricing,” Bell Journal of Economics and Management …

Modifying the Black-Scholes option pricing model for alternative underlying instrumentsModifying the Black-Scholes option pricing model for alternative underlying instruments
www.tandfonline.com [PDF]
… boundary conditions for call and put option prices when the underlying security pays dividends … of Some New Results in Financial Option Pricing Theory,” Journal of Finance, 31, 383 … RC, (1973), “Theory of Rational Option Pricing,” Bell Journal of Economics and Management …

Volatility effect of ETFs on the constituents of the underlying Taiwan 50 IndexVolatility effect of ETFs on the constituents of the underlying Taiwan 50 Index
www.tandfonline.com [PDF]
… boundary conditions for call and put option prices when the underlying security pays dividends … of Some New Results in Financial Option Pricing Theory,” Journal of Finance, 31, 383 … RC, (1973), “Theory of Rational Option Pricing,” Bell Journal of Economics and Management …

The pricing of options on debt securitiesThe pricing of options on debt securities
www.jstor.org [PDF]
… boundary conditions for call and put option prices when the underlying security pays dividends … of Some New Results in Financial Option Pricing Theory,” Journal of Finance, 31, 383 … RC, (1973), “Theory of Rational Option Pricing,” Bell Journal of Economics and Management …



Q&A About Underlying Security


What is an underlying security?

An underlying security is the security on which a derivative derives its value.

What does "derivative" mean?

A derivative is a financial instrument whose value depends on that of another asset, such as a stock or bond.

Why do investors need to research an underlying security?

Investors need to research an underlying security because it affects their investment decisions regarding the derivative. If they don't understand how the value of the derivative changes with respect to changes in the value of its underlyings, then they may not be able answer important questions about their investments, such as whether it's profitable or if there are any risks involved with holding them.

How can derivatives be used to make money?

Investors use derivatives to speculate and hedge risk. Speculators hope to profit from changes in the price of the underlying security by buying and selling derivatives before they expire. Hedgers use derivatives to protect themselves against adverse price movements in the underlying securities.

Leave a Reply

Your email address will not be published. Required fields are marked *