1. In derivatives, the security that must be delivered when a derivative contract, such as a put or call option, is exercised.
2. In equities, the common stock that must be delivered when a warrant is exercised, or when a convertible bond or convertible preferred share is converted to common stock.
The price of the underlying is the main factor that determines prices of derivative securities, warrants and convertibles. Thus, a change in an underlying results in a simultaneous change in the price of the derivative asset that is linked to it. In most cases, the underlying is a security such as a stock or a commodity .
