Underlying instrument - Definition and Overview

In finance, an underlying is an investment from which a derivative security is derived. Underlyings are invariably more common and more widely heard of than the securities derived from them. However the total market value of a derivative market may exceed the market of the underlying on which it is based.

For example in the case of a call option on a stock, the stock is the underlying and the option is the derivative. In the case of an option on a bond, the bond is the underlying. Stock indexes such as the Dow Jones Industrial Average or Nikkei 225, interest rates such as a LIBOR or credit ratings can also be underlyings of particular securities.