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What Is Underlying Contract

Options on futures derivatives are an example of derivatives whose basis is also a derivative. For example, Euro-Bund options (OGBL) are traded on Eurex and their underlying asset is the Euro-Bund Futures (FGBL). The underlying applies to both equities and derivatives. In the case of derivatives, the underlying refers to the security to be delivered when a derivative contract, e.B a put or call option, is exercised. According to the Statement of Financial Accounting Standards No. 133 (FAS 133) – Accounting for Derivatives and Hedging Activities of the Financial Accounting Standards Board (FASB), an underlying asset is a specific interest rate, the price of securities, the price of commodities, the exchange rate, the price index or interest rates or any other variable (including the occurrence or non-occurrence of a particular event such as a planned payment under a contract). An underlying asset can be a price or interest rate on an asset or liability, but it is not the asset or liability. For example, in the case of a stock option of 100 nokia shares at a price of 50 euros in April 2011, the underlying asset is a Nokia share. A futures contract for the purchase of €10 million of German 10-year government bonds is based on German government bonds. Other examples include stock market indices such as the Dow Jones Industrial Average and the Nikkei 225, which are based on the common shares of 30 major U.S. companies and 225 Japanese companies, respectively. Where reference is made to trading shares, reference is made to the common shares to be delivered during the exercise of a warrant or when a convertible bond or convertible preferred share is converted into common shares.

The price of the underlying asset is the main factor that determines the prices of derivatives, warrants and convertible bonds. Therefore, a change in the price of the underlying results in a simultaneous change in the price of the associated derivative asset. There are other financial instruments based solely on the movement of debt and equity. There are financial instruments that rise when interest rates rise. There are also financial instruments that fall when stock prices fall. These financial instruments are based on the performance of the underlying or on the exposure to debt and equities that constitutes the initial investment. This class of financial instruments is called derivatives because it derives value from the movements of the underlying asset. In general, the underlying is a security, that is. B a share in the case of options or a commodity in the case of futures contracts. Two of the most common types of derivatives are called calls and puts. A call derivatives contract gives the owner the right, but not the obligation, to purchase a particular stock or asset at a specific strike price.

If Company A is trading at $5 and the strike price is reached at $3, the share price tends to rise, the call is theoretically worth $2. In this case, the underlying is the stock that is valued at $5, and the derivative is the call that is valued at $2. A derivative contract gives the owner the right, but not the obligation, to sell a particular stock at a specific strike price. If Company A is trading at $5 and the strike price is reached at $7, the share price tends to fall, the put is trading at $2 in silver and is theoretically worth $2. In this case, the underlying is the stock that is valued at $5, and the derivative is the sales contract at the price of $2. Both the call and the put depend on the price movements of the underlying asset, which in this case is the share price of Company A. In finance, the underlying of a derivative is an asset, a basket of assets, an index or even another derivative, so the cash flows of the (old) derivative depend on the value of that underlying asset. There must be an independent way to respect this value in order to avoid conflicts of interest.

There are two main types of investment: debt and equity. The debt must be repaid and investors are compensated in the form of interest payments. Equity does not have to be repaid and investors are compensated by share price increases or dividends. Both investments have specific cash flows and benefits, depending on the individual investor. This economy article is a heel. You can help Wikipedia by extending it. .

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