In the Underdark I have been asked to kill this demon but I can't find it anywhere!
I have completed the mindflayer dungeon and the southern tunnels with the beholders etc. (I don't know if this is relevent I just thought it might be)

OK its right to the right of the caves where you get hired. You need a +3 to hit it and it can counfuse you at will.

Go north from the Svirfneblin city. There is a guard standing by the door who'll let you enter and then go down the stairs.

It also stuns you with each hit. I'd put a wizard's eye out in front and let him chew on that. Attack him with ranged weapons or spells.

That Balor demon isn't all that nasty! But I have to say he nearly wiped out my friends, but not me.