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]
- 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 [PDF]
- Efficient Monte Carlo barrier option pricing when the underlying security price follows a jump-diffusion process – jod.pm-research.com [PDF]
- Option initiation and underlying market behavior: Evidence from Norway – search.proquest.com [PDF]
- Modifying the Black-Scholes option pricing model for alternative underlying instruments – www.tandfonline.com [PDF]
- Volatility effect of ETFs on the constituents of the underlying Taiwan 50 Index – www.tandfonline.com [PDF]
- The pricing of options on debt securities – www.jstor.org [PDF]
