what is underlying 
underlying when used in equity trading is the common stock that must be delivered when a warrant is exercised or when a convertible bond or convertible preferred share is converted to common stock the price of the underlying is the main factor that determines the prices of derivative securities warrants and convertibles therefore a change in the price of the underlying results in a simultaneous change in the price of the derivative asset linked to it understanding underlyingunderlying applies to both equities and derivatives derivatives contracts are typically structured around the price or value of another asset such as a stock price in this case the stock is the underlying asset of the derivative when the price of the underlying stock goes up the market price of the derivative may go up or down as well in futures contracts the underlying is a commodity such as gold oil or wheat if those commodities markets face a disruption the futures that use that commodity as an underlying will also be affected convertibles are also structured around an underlying asset sometimes using derivative like features these are debts that may be repaid like bonds or under certain conditions may also be repaid in company shares since the value of the shares will affect the value of the convertible the shares are described as the underlying asset to the convertibles while commonly used to refer to assets an underlying can also be an interest rate a benchmark or even another derivative financial derivativesthe term underlying appears most often in relation to derivative contracts which are often structured around another asset options trades represent one of the most popular derivatives trades in which traders make sophisticated bets on the future price of certain stocks or commodities if the terms of the contract are met the trader can make a profit however the underlying of a derivative is not always an asset there are also derivatives whose underlying is a benchmark index interest rate or another important financial metric when this metric rises or falls the derivatives that use the metric as an underlying see price gains or drops the underlying can even be another derivative many interest rate swaps use the secured overnight financing rate sofr to exchange cash flows between two entities when the sofr benchmark rate rises the value of the swap changes as well pros and cons of underlying