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

In the context of derivatives, which of the following best describes the 'underlying' of a derivative contract?

The underlying is the asset or variable, such as a stock, index, commodity or currency, from which a derivative contract derives its value. The clearing corporation, margin and expiry date are parts of contract mechanics and do not determine the contract's value.

  1. AThe asset or variable from which the contract derives its valueCorrect
  2. BThe clearing corporation that guarantees the contract
  3. CThe margin deposited by the buyer of the contract
  4. DThe expiry date on which the contract ceases to exist

Explanation

A derivative is a contract whose value depends on something else, called the underlying. The underlying can be a stock, index, commodity, currency or interest rate. The clearing corporation, margin and expiry are features of the contract mechanism, not the source of its value.

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