UK Accounting Glossary
In finance, the term underwater can have two distinct meanings. First, an underwater stock option, also known as an out of the money option, would be one that is worthless. This can refer to a call option with a strike price that exceeds the market price of the underlying stock. Conversely, a put option would be underwater if its strike price is less than the current market price of the underlying stock.
The second usage of the term underwater in finance is in regards to solvency (i.e. book value exceeds market value). An investor who is underwater has become insolvent, or unable to meet their financial obligations. This can refer to a margin call on a brokerage account as well as a home mortgage (i.e. underwater loan). Many mortgages went underwater as a result of the bursting of the housing bubble in the late 2000s. A homeowner with an underwater mortgage may be unable to sell the property without paying the amount underwater (i.e. losses) beforehand or negotiating loan modification terms with the lender.
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This glossary post was last updated: 5th February 2020.