Index derivatives

Key Takeaways

1. Index derivative is the financial derivative contract that has an underlying asset as the index itself.
2. Index derivative comprises futures and options.

Index derivatives allow an investor to trade in a group of assets the index represents, without having to buy each underlying security/ asset in that group or market.

Index derivatives include options and futures contracts.

About Index Derivative

Index derivative is the financial derivative contract that has an underlying asset as the index itself. This means that the investor can trade in the group of assets the index represents without buying each underlying security/ asset in that group or market.

Index derivative comprises futures and options.

Examples of the index derivatives along with their underlying asset (index) are

1. Nifty futures and Nifty options:- for both the futures and options the underlying asset is Nifty 50
2. Nifty midcap 50 futures and options: – Nifty midcap 50 is the underlying asset
3. Sensex futures and options: – the underlying asset is Sensex.

Futures contracts are a type of derivative where the buyer has to speculate the price of the underlying assets and then make a decision on buying the particular asset from the seller at a future date on a pre-fixed price. This asset can be anything such as commodities like gold, grains, etc. or can be in the form of stocks, bonds, government securities, and also indexes. Index derivatives are mostly future contracts where the underlying assets are a market index. In the index future, the buyer of the contract has to speculate the price of the index in the future and then decide to sell the asset at a pre-fixed price on the specified date in the future.