MARKET INDEX
To understand the use and functioning of the index derivatives markets, it is necessary to understand the underlying index. In the following section, we take a look at index related issues. Traditionally, indexes have been used as information sources. By looking at an index, we know how the market is faring. In recent years, indexes have come to the forefront owing to direct applications in finance in the form of index funds and index derivatives.
Index derivatives allow people to cheaply alter their risk exposure to an index (hedging) and to implement forecasts about index movements (speculation). Hedging using index derivatives has become a central part of risk management in the modern economy.
