Financial Terms / underlying asset

# Underlying Asset Basics: Options & XYZ Stock

Underlying assets are the financial assets that form the basis for a derivative's price. Options are one type of derivative, and their underlying asset is typically the stock of a particular company.

## How do I calculate the underlying asset?

`To calculate the underlying asset of a derivative, it is important to first identify what type of derivative it is. Options are a type of derivative that has a price based on an underlying asset. For example, the underlying asset for an option might be the stock of XYZ. Once the underlying asset has been identified, the next step is to use the relevant formula to calculate the value of the underlying asset. For example, in Sourcetable, the formula `=ABS(C2-D2)` can be used to calculate the underlying asset. This formula takes two arguments (C2 and D2) and returns the absolute value of the difference between them. This can be used to calculate the underlying asset of a derivative.`

## What is an Underlying Asset?

`An underlying asset is a financial instrument upon which a derivative's price is based. It can be a stock, a bond, a commodity, a currency, an index, or any other asset that has a market price.`

## Why is an Underlying Asset Important?

`Underlying assets are important because they determine the value of derivatives such as options, futures, and swaps. The performance of the underlying asset directly impacts the value of the derivative. For example, a call option gives the holder the right to buy the underlying asset at a certain price. If the price of the underlying asset increases, the value of the call option also increases.`

## How Does an Underlying Asset Work in Derivatives?

`In a derivative contract, the underlying asset is the item that the parties agree to exchange. For example, in a futures contract, the buyer agrees to purchase, and the seller agrees to deliver, the underlying asset at a set price and date in the future. The price movements of the underlying asset determine the profits or losses for the parties involved.`

## What are Common Types of Underlying Assets?

`Common types of underlying assets include stocks, bonds, commodities, currencies, interest rates, and market indexes. For example, a stock option has a specific stock as the underlying asset, while a commodity futures contract might have gold, oil, or wheat as the underlying asset.`

## Can I Own an Underlying Asset Without Owning the Derivative?

`Yes, you can own an underlying asset without owning any derivatives based on it. For example, you can own shares of a company's stock without owning any options or futures contracts based on that stock.`

## Key Points

What is an Underlying Asset?
An underlying asset is a financial asset that a derivative's price is based on. In the case of stock options, the underlying asset is the stock of XYZ.
What is a Derivative?
A derivative is a financial instrument whose value is based on the value of an underlying asset. Options are a type of derivative whose underlying asset is stock of XYZ.
What is an Option?
An option is a derivative security that gives the owner the right, but not the obligation, to buy or sell the underlying asset at a predetermined price within a certain period of time.