When talking about investments, you often hear the underlying asset.
But what is an underlying asset, and why is it important?
Underlying or underlying assets are the basis for issuing a financial instrument with an economic value.
Therefore, the underlying becomes an essential component that must be observed in an investment instrument, both derivative investment and futures contracts.
The underlying function of an investment is to guarantee the investment activities carried out. However, not all investments have underlying assets.
So, to find out more about what is meant by the underlying asset in investment and crypto assets, along with examples, see the following review.
What are Underlying assets?
As mentioned above, the underlying is the financial asset used as the basis for the price of the derivative instrument.
Derivatives are financial instruments with prices based on different assets.
It can be interpreted that derivatives are a form of bilateral contracts or payment exchange agreements made by market participants.
Derivatives have a value derived from the product that will become the underlying product.
The derivative agreement or contract contains the exchange of assets, money, or a specific value in the future.
Later, the agreement will be guided by assets that have become the primary reference.
Then, the contract is used to manage investment risk. This risk management is carried out based on price movements of investment instruments without directly affecting the position of the underlying assets.
Underlying asset terms
The following are some of the conditions and characteristics of the underlying assets that need to be known.
1. Has Economic Value
The first requirement is that each asset used as the underlying must have economic value or clarity regarding the cash receipts flow.
Underlying can be tangible assets, including land, buildings, or other types of buildings.
Then, it can also be in the form of intangible assets, ranging from the value of benefits of tangible assets to projects that are about to be or are under construction.
2. Not Contrary to Sharia Principles
In the following conditions, the issuer must guarantee that the underlying asset does not conflict with sharia principles in any form throughout the period.
3. Not Related to Illegal Substances
Finally, the underlying must not be related to illicit substances in all forms of assets or goods and services in every production activity, trade, and supply.
Underlying According to OJK
The underlying asset is one of the terms born in the Sukuk investment instrument regulated by the Financial Services Authority (OJK).
According to the OJK, underlying assets are assets that form the basis for the issuance of sukuk.
Please note sukuk are securities issued under sharia principles. The form can be a certificate or proof of ownership with a value representing a specific or underlying asset.
Underlying assets example
In the case of stock options, the underlying asset used is the stock itself.
In this case, the underlying asset will be used to determine the value of the stock options until they expire.
The value of these assets may change before the contract ends. As such, it will significantly affect the value of the stock options.
The underlying asset’s value for a certain period allows traders to find out which stock option is worth buying or vice versa.
Underlying assets in Crypto
Everything digital is very common in the world of crypto assets. For those of you who want to invest in crypto assets that have underlying assets, you should first read the documents for the crypto coin you will choose.
This is important to find information on the basis for issuing the coins in question.
An example of an underlying crypto asset is the Non-Fungible Token (NFT), which is based on the rights to works of art.
In line with its definition, NFT is an asset in the form of a digital certificate that represents real-world objects, from art to music to game items, for example, NFT Art.
Real and original assets form the basis for the birth of the NFT digital certificate.
Crypto Investment with Underlying assets
As mentioned above, NFTs as works of art are the underlying assets of crypto assets.
This is because there is a blockchain where the circulation of an NFT can be traced, starting from the original publisher to the buyers.
NFT itself has a representation of ownership of physical assets in the real world, namely physical works of art that may be traded.
As for the underlying assets in the NFT, namely assets guaranteed the right to a work of art, both the guarantee of originality and the form of the authenticity of the art.
In a sense, in the NFT world, the art of cannot be duplicated, let alone replicated in mass form, because it is protected by specific codes that can track the distribution of NFT assets, starting from the NFT issuer, the initial owner, to the final owner of the NFT.
In conclusion, the underlying is the financial asset on which the derivative instrument is priced.
Derivatives themselves are financial instruments with prices based on different assets.
That is, derivatives are bilateral contracts/payment exchange agreements made by market participants.
In this case, the derivative has a value derived from the product that will become the underlying product.
There are several conditions on the underlying, namely having economic value, not contradicting sharia principles, and not having anything to do with illicit substances.
Meanwhile, examples of underlying assets can be seen in NFTs or Non-Fungible Tokens in the crypto world.
In general, crypto investments with underlying assets are an attractive alternative for investors who wish to trade and store their assets in the form of crypto assets.
However, as with other types of investment, investors must consider risks and conduct research before deciding to invest.
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