What Is An Underlying Asset In Financial Trading?

What Is An Underlying Asset In Financial Trading?

The world of investing is a diverse one. Investors can choose to directly own assets, such as bonds, stocks, crypto, etc. On the other hand, they can invest in financial derivatives and funds, the performance of which depends on the asset they are tracking. 

This is called the underlying asset and is a cornerstone of some of the most complex financial instruments available on the market. 

From equity instruments, such as ETFs and REITs, to financial derivatives, such as options and futures contracts, the underlying asset can be anything investors can otherwise directly access and own themselves. 

For example, ETFs tracking the performance of the S&P 500 are some of the most popular investment vehicles on the equities market. The underlying asset of these funds is the S&P 500 index itself, which is a basket of some of the largest listed equities in the United States and the world. 

Types Of Underlying Assets

An underlying asset can be anything that can be tracked and that creates a derivatives market around it. Investors and traders tend to speculate on the price of an asset without wanting the burden of owning the asset itself. 

The various types of underlying assets include:

  • Stocks: Equity derivatives, such as options and futures contracts, are often based on the stock of publicly traded companies. While individual funds may own many different equity instruments, each of these instruments do not represent their underlying assets, but rather, are direct assets held on the books of the firms administering these funds
  • Bonds: Some derivatives, like bond futures, use bonds as the underlying asset
  • Crypto: Some financial products are now based on cryptocurrencies like Bitcoin or Ethereum, such as futures and options
  • Commodities: Derivatives, such as futures, based on physical commodities like gold, oil, wheat, and natural gas are common
  • Currencies: In the foreign exchange (forex) market, currency pairs ( EUR/USD, GBP/JPY) are considered underlying assets for forex trading. Traders can also buy futures and options with currencies as underlying assets
  • Indices: Stock market indices, like the S&P 500, NASDAQ, or Dow Jones Industrial Average, serve as underlying assets for index futures and options
  • Real Estate: Real estate investment trusts (REITs) and real estate derivatives use real estate properties as underlying assets
  • Interest Rates: While not assets in a traditional sense, interest rate derivatives, such as swaps or treasury bonds futures are linked with the performance of interest rates. Central banks can greatly influence the performance of these derivatives by changing the underlying interest rates, whether they increase or decrease them 

Liquidity And Volatility

The price movements in the underlying asset are what determine the performance of the derivative. For this reason, underlying asset prices are the single most important factors on any financial market. 

However, depending on the type of derivative, the degree of influence of the underlying asset can vary. 


  • Call options - When the price of the underlying asset rises, the value of call options (which give the holder the right to buy the asset at a specified price) increases. This is because the option holder can buy the asset at a lower price and potentially profit from selling it at the higher market price
  • Put options - Conversely, when the underlying asset's price falls, the value of put options (which give the holder the right to sell the asset at a specified price) increases. Put option holders can sell the asset at a higher price than the market price

Futures & Forwards

  • In futures and forward contracts, changes in the price of the underlying asset directly affect the contract's value. If the underlying asset's price moves in the direction that favors a long (buy) position, the contract increases in value. Conversely, if the price moves against a long position, the contract decreases in value


  • In interest rate swaps, changes in benchmark interest rates (the underlying assets) affect the interest payments exchanged between the parties. For example, if interest rates rise, the party receiving a fixed interest rate payment benefits, while the party receiving a variable rate payment loses

Key Takeaways From What Is An Underlying Asset In Financial Trading

  • Underlying assets are assets on which derivatives contracts are based
  • The price of the derivative instrument is based on the underlying asset and its price dynamic
  • An underlying asset can be anything from stocks and bonds to crypto and real estate 
  • Derivatives, such as options and futures contracts are especially sensitive to the price movements of the underlying asset 
  • Interest rates can also be underlying assets, as swaps are derivatives based on underlying interest rates

FAQs On Underlying Asset

How does an underlying asset work?

An underlying asset serves as the basis for derivative contracts in trading. Its price movements directly affect the value and performance of derivatives. Traders use derivatives to speculate on or hedge against changes in the underlying asset's price or other characteristics.

What are examples of underlying assets?

Examples of underlying assets in trading include stocks (for stock options and futures), bonds (for bond futures), currencies (for forex contracts), commodities (such as gold, oil, and agricultural products), indices (like the S&P 500), interest rates, and cryptocurrencies like Bitcoin.

Is an underlying asset volatile?

Some underlying assets, like individual stocks or cryptocurrencies, can be highly volatile, experiencing frequent and significant price fluctuations. Others, such as government bonds or stable currencies, tend to be less volatile and more stable in value.