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Stock Indices, Volatility, and Risk Management Strategies

Stock index derivatives are based on stock indices, and play a significant part in financial markets. Some of the indices include the Dow Jones Industrial Average, S&P 500 and FTSE 100, which are exchange traded- however, some stock index derivatives are traded over-the-counter. This paper enunciates on the classification of index derivatives in terms of whether they are value weighted or price weighted. Furthermore, in this paper, the role of stock indices in managing risk is explored, and a number of indices explained. Given the volatility of financial markets, especially in the wake of the recent global financial crisis, volatility derivatives have become ever more pertinent- and the paper brings these to light.