Underwater (Valuation) – Definition

Cite this article as:"Underwater (Valuation) – Definition," in The Business Professor, updated July 31, 2019, last accessed August 14, 2020, https://thebusinessprofessor.com/lesson/underwater-valuation-definition/.


Underwater Definition

Underwater is a term that refers to a situation in which the present value of an asset is less than its face or nominal value. When the market value of an asset is less than the original amount that the owner paid for it, such as asset has gone underwater.

Underwater is a term that can be used in many fields, such as mortgage contracts, financial contracts, loans, and investments. In options, when a call option is traded at a price above its strike price, it has gone underwater. In a loan agreement, when the loan is below its book value, it is underwater.

A Little More on What is Underwater

In call options, when an option is trading at a strike price lower than the value of the underlying asset, it is underwater.  Usually, the purpose of investing in an asset is to benefit from its sales at the time of maturity, in the case of an asset, it its current market value is less than its notional (book) value, such an asset is underwater.

In a financial contract, the face value of the instrument is important, it tells whether profit or loss has been made on the instrument at the end of the investment. Underwater is a situation whereby the face or book value of the asset surpasses its current value.

Underwater Real Estate

When the value of a property has greatly diminished to the extent that it has a poor value, it is underwater. Underwater also occurs in real estate, it describes a situation whereby the worth of a property is less than the loan taken for the property. For instance, if a property is sold to repay a loan, and its current amount is less than the amount owed, the property is underwater. Hence, the inability of a property to produce enough money needed to pay off a lender or mortgage holder is called underwater. Insolvency is a term that is associated with an asset or property that is underwater.

References for “Underwater

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