Template:M summ Equity Derivatives 1.5

Section 1.5 Index Transactions

Index Transactions are, on one view, glorigied, big, dynamic share Basket Transactions, only where the rebalancing is carried out by an independent third party. In any case bear in mind you cannot exactly “buy” or, therefore, hedge an Index the way you can buy and directly hedge a Share, so you must hedge by: buying and then rebalancing all the underlying components of the Share, which means you are at the mercy of the market, and there is bound to be some kind of tracking error, or buying a future on the Index, in which case someone else is at the mercy of the market, or an exchange-traded fund which tracks the Index.

Our unscientific hypothesis is that most equity derivative dealers will hedge the Index Swaps they write with physical shares, or futures.