Underlying Asset
Candlefocus EditorA derivative is any financial instrument whose value is derived from an underlying asset. This includes futures contracts, options, swaps, and other financial instruments. By understanding the value of the underlying asset and using derivatives, traders can make buying and selling decisions with greater accuracy.
When a trader buys a derivative, they are not actually buying the underlying asset. Instead, they are buying or selling a contract with a predetermined payout or delivery based on the price movements of the underlying asset. Thus, the underlying asset acts as the basis for the derivative.
The underlying asset can create a wide range of investment opportunities for traders. For example, a trader can use futures contracts as a way to hedge their risk on a physical asset. By buying or selling a futures contract with an expiration date, traders can lock in a price and protect themselves from price fluctuations.
Traders can also use derivative contracts to speculate on the price movements of an underlying asset. This can range from trading simple stocks and commodities to more sophisticated derivatives such as options and futures contracts. By properly predicting the movements of the underlying asset, traders can take advantage of short-term profitable opportunities.
Knowing the value of the underlying asset is key to understanding the proper course of action with a derivative. Without proper knowledge of the underlying asset, traders cannot make informed buying and selling decisions with their derivative. By studying an underlying asset and properly using derivatives, a trader can increase their chances of making successful trades.