The financial assets on which a derivative’s pricing is based are known as underlying assets. Derivatives include things like options. A derivative is a financial product whose price is determined by the value of another asset. The value of derivatives is determined by the underlying assets. An option on stock XYZ, for example, grants the holder the right to purchase or sell XYZ at the strike price until the option expires. The stock of XYZ is the option’s underlying asset.
An underlying asset can be used to indicate the thing in the agreement that gives the contract its value. The underlying asset underpins the agreement’s security, which the parties agree to exchange as part of the derivative contract.