This is the asset specified in an option contract that is transferred when the option contract is exercised, unless cash-settled. With cash-settled options, only cash changes hands, based on the current price of the underlying.
or underlier An option or a future is a right or a commitment to buy or sell something at a future date. The underlying is the financial instrument that may or must be bought or sold in each option or futures contract. FAS 133, as amended by FAS 149, defines an underlying to be a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable (including the occurrence or nonoccurrence of a specified event such as a scheduled payment under a contract). An underlying may be a price or rate of an asset or liability but not the asset or liability itself.
In finance, the underlying of a derivative is an asset, basket of assets, index, or even another derivative, such that the cash flows of the (former) derivative depend on the value of this underlying. There must be an independent way to observe this value to avoid conflicts of interest.
In respect to excess of loss reinsurance coverages, refers to that amount of risk reinsured in terms of possible primary or first-loss, which is deductible before the insurance or reinsurance comes into action.