Glossary

Underlying instrument

A security that must be delivered or accepted when an options or futures contract is exercised or when it matures

Both commodities and financial instruments (shares, bonds, currencies, indices, etc.) can underlie derivatives contracts.

Some underlying instruments, such as commodities, shares, bonds, or currencies, can be physically delivered, while others - so-called notional underlying instruments - cannot. Notional underlying instruments are standardized and assigned certain attributes so that they can serve as benchmarks. For example, the Bund future is a contract on a notional instrument which represents a classic Federal Government Bond, with an interest rate of six percent and a maturity of ten years. Indices are another type of notional underlying instrument. An option on DAX® is a contract on the stock portfolio which represents the DAX® shares with their relative weightings.

Also see:  Derivatives market, Future, Option
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