A derivative financial product is a contrived instrument, the value of which depends
indirectly on the price of a cash instrument. The price of the cash instrument is
referred to as the "underlying" price, quite often. Examples of cash instruments
include actual shares in a company, physical stocks of commodities, cash foreign
To elucidate suppose the government announces a corporate tax hike, we expect the
index to be negatively impacted.
The market capitalisation weighted model is the most popular and widely considered
to be the best way of determining the index values.