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NISM Certifications · NISM-Series-VIII: Equity Derivatives · Basics of Derivatives

In the context of derivatives, what does the term 'underlying' refer to?

The underlying is the asset, index or rate from which a derivative contract derives its value. Examples include a stock, a stock index, a commodity or a currency. Margin, expiry and premium are contract features, not the underlying itself.

  1. AThe asset, index or rate from which the derivative contract derives its valueCorrect
  2. BThe margin deposited with the clearing corporation
  3. CThe expiry date of the contract
  4. DThe premium paid by the option buyer

Explanation

A derivative has no value of its own; its value depends on an underlying such as a stock, index, commodity, currency or interest rate. Margin, expiry date and premium are features of the contract or trade, not the underlying.

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