A derivative instrument whose performance is based on or tied to an underlying benchmark index. In other words, the underlying asset of such a derivative is an index rather than individual securities or indexed assets or an ad-hoc collection thereof. An index derivative is written on market indexes, which are not traded directly on the market, but whose collective performance can be traded, capitalizing on the differences between market entry and exit points.
The investor (holder of an index derivative) can trade in the index assets without having to trade each underlying security/ asset in that a group of assets or the market.
Index derivatives include index options, index futures, etc.
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