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

Which of the following best describes the 'underlying' in an equity derivative contract?

The underlying is the asset, such as a share or stock index, from which a derivative contract derives its value. The derivative's price moves with the underlying. Margin, premium and expiry date are contract features and do not represent the underlying.

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

Explanation

A derivative has no independent value; its price depends on an underlying such as a share or an index. Margin, premium and expiry date are features of the contract, not the underlying itself.

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