Underlying asset

The market a derivative contract references. A contract for difference on a share does not contain the share; it contains an agreement between two parties to settle the difference in that share's price. The underlying supplies the number the contract is calculated from, and the contract's specification names it precisely: which instrument, priced from which source, in which currency, and in what quantity one contract covers.

The reference price is a stated thing rather than an obvious one, and where it comes from differs by class. A currency contract references the spot rate dealt between banks. A share contract references the price on the exchange where the share is listed, during that exchange's hours. An index contract references the index calculation while its constituents are trading, and outside those hours it is priced from the listed future on the same index instead, which is why an index quote can move overnight although not one constituent share has traded. The quoted derivative price is therefore derived from the underlying and adjusted, not copied from it.

What the reference does not carry is ownership. Holding a derivative on a share confers no title, no vote and no dividend: where a payment is due to holders of the underlying, a dividend adjustment reproduces the cash effect on the contract without any share changing hands. A second and less obvious point is that a widely traded share has more than one price at any instant, since it trades on several venues at once, so which venue counts as the underlying reference is a decision written into the specification. Practitioners disagree about whether a primary listing or a consolidated view is the fairer reference, and providers do not all answer it the same way.