Underlying

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For the phonological term, see Underlying representation.

In finance, the underlying of a derivative is an asset, basket of assets or index, such that the cash flows of the derivative depend on its value. 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 indices such as the Dow Jones Industrial Average and Nikkei 225.