An underlying asset is the underlying asset that determines the value of a derivative financial instrument. In the context of finance and investment, derivative instruments are contracts that derive their value from the performance or value of another asset, called the underlying asset. Common examples of derivative instruments include options, futures, and swaps.

**Here are some key points about underlying assets:**

**Types of Underlying Assets:**

**Stocks:** In stock options, the stock of a particular company is the underlying asset.

**Bonds: **In a bond futures contract, a specific bond is the underlying asset.

**Commodities:** In commodity futures contracts, such as oil, gold or wheat, the commodity is the underlying asset.

**Currencies: **In a currency futures or currency options contract, a specific currency such as the US dollar or euro is the underlying asset.

**Market Indices:** In index options or index futures contracts, a stock market index such as the S&P 500 or Dow Jones Industrial Average is the underlying asset.

**Digital Assets:** In crypto futures or options, cryptocurrencies such as Bitcoin or Ethereum are the underlying assets.

**Functions of Underlying Asset:**

**Value Determination: **The value of a derivative instrument depends on changes in the value of the underlying asset. For example, the price of a stock option will depend on the price movement of the underlying stock.

Hedging and Speculation: Derivatives with underlying assets are used by investors for hedging (protecting the value of an investment) or speculation (capitalizing on price movements for profit).

**Examples of Underlying Asset Usage:**

**Stock Options:** Suppose you buy a call option on XYZ company stock. XYZ stock is the underlying asset of the option. If the price of XYZ stock rises, the value of your call option will increase.

**Commodity Futures Contracts: **If you have a futures contract to buy oil at a certain price in the future, oil is the underlying asset of the contract. The movement of the oil price will affect the value of your futures contract.

**Risk of the Underlying Asset:**

Changes in the price of the underlying asset affect the value of the derivative instrument directly. This can result in profits or losses for the derivative holder, depending on the direction in which the underlying asset price moves and the type of position taken (for example, a long or short position).

Overall, understanding the underlying asset is very important for investors and traders using derivative instruments, as the performance and risk of such instruments are closely linked to the price movements of the underlying asset.