Underlying asset

The value of derivative instrument is derived from the characteristics and value of a related stock and this is known as the underlying asset. The underlying can be any stock, commodity, bullion or Index. The underlying asset is the specific asset based on which the derivative contract is bought or sold.

For e.g., when ABB 600 call is exercised the underlying asset viz., the shares of ABB is bought. When ABB 600 put is exercised, the stock of ABB is sold. Note that the derivative contracts can be bought or sold without actually buying or selling the underlying.

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