Introduction to commodity indices..!
A change in a representative group of individual data points.
It is often expressed in percentage changes from a base year or from the previous month. Indices measure the ups and downs in the market prices of underlying constituents, which could be financial assets like securities, currencies, and commodities.
Due weightage, based on perceived importance and purpose, are given to the various underlying constituents for the computation of an accurate index that eventually represents the intended
segment appropriately.
MCX has developed a composite commodity index, namely MCX COMDEX in 2005, which reflects the prices of commodity futures traded on the MCX platform. However, the index is not traded.
What is commodity index?
Investopedia defines ‘Commodity Index’ as an index that tracks a basket of commodities to measure their performance.
Globally, these indices are often traded on exchanges, allowing participants to gain easier access to a
basket of commodities without having to enter into individual commodity futures contract.
Unlike stock index that captures the cash price movement of underlying pre-decided basket of stocks, commodity index captures the price movement of short-maturity commodity futures contracts that are
periodically rolled over as they approach expiry. Hence, the construction of commodity index is
more complex than a stock index. This is primarily because real-time prices of exchange-traded stocks are available continuously.
On the contrary, prices of commodities (of a particular quality) are not readily available continuously.
Hence, for an index that reflects the fundamentals and is actively tradeable, it must be constructed using futures, rather than cash prices, as there are no effective spot exchanges for commodities.
However, futures contracts expire on the date of maturity. So, to get continuous futures prices,
commodity indices are constructed such that the futures prices of given maturities are considered and replaced with (rolled over to) the subsequent month's contracts.
Factors considered while constituting a commodity index
1. Commodity selection and sector
weightings
2. Specific contract selection for each
individual commodity
3. Rollover methodology
4. Rebalancing criteria and frequency
5. Normalization procedure
Some global commodity indices..
S&P GOLDMAN SACHS COMMODITY INDEX
(SPGSCI)
The S&P GSCI, created in 1992, is world production weighted; the quantity of each commodity in the index is determined by the average quantity of production in the last five years of available data, besides liquidity.
As world production statistics are often incomplete or subject to revision, there is a 1.5 year delay until they are incorporated in the index calculation. The S&P GSCI contains 24 commodities: six
energy products, five industrial metals, eight agricultural products, three livestock products, and two precious metals. It is traded on the CME platform.
BLOOMBERG COMMODITY INDEX (BCOM),
FORMERLY DOW JONES–UBS COMMODITY INDEX
The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Indexes. The index was originally launched in 1998 as the Dow Jones–AIG Commodity Index (DJ–AIGCI) and renamed as Dow Jones–UBS Commodity Index (DJ-UBSCI) in 2009, when UBS acquired the index from AIG.
On July 1, 2014, the index was rebranded under its current name. BCOM is a quantity-based commodity index that predefines a set of criteria to prevent any sector from being dominant in the index. It limits the maximum weight of any commodity to 15% of the index and any sector to 33% of the index. A combination of liquidity and production measures is used to assign weights to individual commodities.
Currently, the index is made up of 22 exchange-traded futures, representing 20 commodities, which are weighted to reflect their economic significance and market liquidity. It is traded on the CME platform.
THOMSON REUTERS CORE COMMODITY CRB INDEX
The original CRB Index has undergone ten weightage revisions since its inception in 1957. The CRB index with its periodic updates as commodity markets have evolved is now known as the Thomson Reuters/Core Commodity CRB Index (TR/CC–CRB Index). It consists of 19 commodities.
The latest 10th revision (2005) included a weightage change from equally weighted components to a 4-tiered grouping system designed to reflect the significance of each commodity segment, that is, energy (39%), agriculture (41%), precious metals (7%), and base / industrial metals (13%). The index trades on the ICE Futures Exchange.
Utility of commodity index trading..!
Most financial contracts on commodities and currencies are prepared and floated on exchanges to meet the twin objectives of price discovery (for reference pricing) and price risk management.
Similarly, an index can act as a price barometer for an entire segment (constituents of
which make up the index) and can be used to hedge (if traded) collectively against the adverse movement in underlying constituents.
In India, index trading in commodities is still not allowed. Once allowed, trading in
indices could be as popular as those in the developed markets.
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