Underlying Market

The Underlying Market refers to the actual asset or instrument upon which derivative products traded in derivative markets are based. A derivative product is typically linked to an underlying asset such as a stock, commodity, index, or currency. This underlying asset is the factor that determines the value of the derivative product.

The underlying market represents the real asset or index on which derivative instruments such as futures contracts, options, or swaps traded in the derivative market are based. For example, a stock futures contract is dependent on the value of the underlying stock or stock index. Similarly, a commodity option gains or loses value based on the price of the underlying commodity.

The underlying market plays a critical role in determining the value and pricing of derivative products. Derivatives are influenced by the price movements of the underlying assets traded in the underlying market, and their values fluctuate accordingly. Therefore, understanding and monitoring the underlying market is important for evaluating the risk and return of derivative products.

Underlying markets are typically traded on organized exchanges or over-the-counter (OTC) markets. In organized exchanges, standardized derivative products based on underlying assets such as stocks, commodities, indexes, and currency pairs are bought and sold. In OTC markets, derivative products are traded as customized contracts and may have more tailored conditions.

Underlying markets provide liquidity to derivative products and support price discovery mechanisms. Investors determine the prices of derivative products and manage their risks based on the information available in the underlying markets. Additionally, underlying markets are important for investors who wish to implement hedging strategies.

In conclusion, the underlying market refers to the actual asset or index upon which derivative products traded in derivative markets are based. Underlying markets play a crucial role in the pricing and risk management of derivative products. Investors determine the value and manage the risks of derivative products by monitoring the underlying markets.