Underlying

The object for trade that underlies a derivative. Underlyings can be goods or financial instruments (shares, bonds, currencies, indices, etc.). The underlying for a share warrant, for example, is the corresponding share; for a DAX Future, the underlying is the DAX itself; for a commodities certificate, it is the commodity.

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 standardised 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 the DAX is a contract on the stock portfolio which represents the DAX shares with their relative weightings.

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