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Chapter 12: Q28. (page 610)

What is meant by the term 鈥渦nderlying鈥� as it relates to derivative financial instruments.

Short Answer

Expert verified

Underlying is a special rate that helps determine the price of the derivative.

Step by step solution

01

Definition of derivative financial instruments

Derivative instruments are the instruments that change their prices according to the change in financial instruments鈥� price, credit risk, etc.

02

Underlying term

Underlying includes various items like security price, index of prices or rate, interest rate, etc. The price of the derivative financial instruments is the sum of all underlying expenses and face value after this amount is multiplied by the number of shares to find the net amount of the derivative contract. If there are any changes in the derivatives, it also affects the price of the derivative instrument.

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