Who uses index derivatives to reduce risk?
• A person who thinks Index fluctuations are peripheral to his activity For example, a person who works in primary market underwriting, effectively has index exposure – if the index does badly, then the IPO could fail. But this exposure has nothing to do with his core competence and interests (which are in the IPO market). Such a person would routinely measure his index exposure on a day-to-day basis and use index derivatives to strip off that risk. Similarly, a person who takes positions in individual stocks implicitly suffers index exposure. A person who is long ITC is effectively long ITC and long Index. If the index does badly, then his long ITC” position suffers. A person like this, who is focussed on ITC and is not interested in taking a view on the Index would routinely measure the index exposure that is hidden inside his ITC exposure, and use index derivatives to eliminate this risk • A person who thinks Index fluctuations are painful An investor who buys stocks may like the pe
