Can anyone tell me what?s the difference between these two, esp in commodity business? I?m doing customer flows in an energy house so the company don?t have the desk for index business, as I understand that banks generally separate commodity into two desks. I understand the basic difference but really want to know about more details. For me if I have a customer deal, generally I will hedge delta first and may b2b some risks on OTC/Exchange. The instrument I use to hedge is very standard/liquid, and marking the skew is a key for daily operation. But how I hedge an index swap (or even an option)? Should I hedge every single component and roll it every month? Should I do PCA analysis before hedging? Do I necessary trade futures curve or just trade spot/front month on each component? For index options, can I think it as a standard basket option?I feel index trading is more complex than customer flows. Would be grateful if anyone can share his ideas. ThanksVincent

You can replicate the index with futures or trade OTC swaps. OTC options on these indices are traded. Hedging indices with a single underlying with options on the underlying can sometimes be done, but often the index actually has exposure to forward vol.Compared to what you are used too, a big difference on the underlying side is that with indices you typically don't have to worry about stochastic convenience yields anymore. Also, I assume right now you trade just APOs, options on futures and maybe cso's? Trading investor products on indices sounds like an exotics job to me, so you'll have to know or learn about risks in exotics then.

thanks BramJ, yes I just trade APOs and floors, had some swaptions and redemption structure before but the size is tiny. Why i have an exposure to foward vol for index options?

http://www.wilmott.com/messageview.cfm? ... =10306EDIT: Maybe what I said previously was a bit too quick. What I meant to say is that the vol of the index is related to the forward vol of the underlying commodities.