index-based contracts

Index-based contracts, such as the Chicago Board of Trade's PCS Options and the Bermuda Commodities Exchange's GCCI Options, are options contracts based on an index.

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These options contracts are insurance derivatives. As derivatives, their value is derived from some underlying instrument. Indexes provide that underlying instrument. Indexes provide loss information relative to individual loss events and aggregate loss data. The more accurate the loss information is, the better the index is. Variation between a hedger's actual losses and those used by the index creates basis risk.