Underlying

In finance, the underlying of a derivative is an asset, basket of assets, index, or even another derivative, such that the cash flows of the (former) derivative depend on the value of this underlying. There must be an independent way to observe this value to avoid conflicts of interest.

According to the Financial Accounting Standards Board's FASB Statement of Financial Accounting Standards No. 133 (FAS 133) - Accounting for Derivative Instruments and Hedging Activities, an underlying is a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable (including the occurrence or nonoccurrence of a specified event such as a scheduled payment under a contract). An underlying may be a price or rate of an asset or liability but is not the asset or liability itself.

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Famous quotes containing the word underlying:

    It is commonplace that a problem stated is well on its way to solution, for statement of the nature of a problem signifies that the underlying quality is being transformed into determinate distinctions of terms and relations or has become an object of articulate thought.
    John Dewey (1859–1952)

    If the worker and his boss enjoy the same television program and visit the same resort places, if the typist is as attractively made up as the daughter of her employer, if the Negro owns a Cadillac, if they all read the same newspaper, then this assimilation indicates not the disappearance of classes, but the extent to which the needs and satisfactions that serve the preservation of the Establishment are shared by the underlying population.
    Herbert Marcuse (1898–1979)

    The welfare, the happiness, the energy and spirit of the men and women who do the daily work ... is the underlying necessity of all prosperity.... There can be nothing wholesome unless their life is wholesome; there can be no contentment unless they are contented.
    Woodrow Wilson (1856–1924)