What is the “underlying” of a futures or options on futures contract?
Futures and options on futures contracts are traded on a broad range of products, financial instruments, indexes and market exposures. The specific commodity, currency, index or financial instrument that “underlies” a futures or options on futures contract is referred to as the “underlying.” For example, bushels of wheat underlie wheat futures contracts. In the case of tangible commodities and financial instruments, the “underlying” is sometimes called the “cash” commodity, which is traded in the so-called “cash” market. The underlying may or may not be a tangible product or financial instrument. For example, the underlying of a Eurodollar futures is the interest rate paid on U.S. dollars on deposit in London banks. In recent years, futures and options on futures markets have been created on innovative underlying market exposures such as catastrophic insurance losses and commodity and stock indexes.
Related Questions
- Are there different trading segments at NSE which offer futures and options instruments with different types of underlying?
- What are the benefits of using CFD’s to hedge exposure to an underlying asset rather than using options or futures?
- What are the benefits of using CFDs to hedge exposure to an underlying asset rather than using options or futures?
