# Computation of Commodity Indices

In the MCX iCOMDEX family, the single commodity indices of all constituent commodities are first computed with prices of the relevant constituent futures contracts.

Apr 15, 2020 07:04 IST India Infoline News Service

Further to our series on introduction of Commodity Indices in India, last week we had disccused about Construction of Commodity Indices, today let us understand Computation of Commodity Indices.

At the fundamental level, commodity index values are computed in the same manner as any index series. However, there are some variations in the computation between equity and commodity indices.

In the MCX iCOMDEX family, the single commodity indices of all constituent commodities are first computed with prices of the relevant constituent futures contracts. Using the values of the single commodity indices so obtained, the composite and sectoral indices are computed.

The Base Value of all indices of the MCX iCOMDEX indices has been set at 10,000 as at the close of 31 December 2015.

To compute values of the MCX iCOMDEX Bullion Index, values of its constituent single indices, i.e. Gold Index and Silver Index are determined. The value of the Gold Index number is computed as follows:

Where,
FPGt  =  Gold futures price on day t
FPG t-1 =  Gold futures price on day t-1

This is explained numerically as follows:
 Date Gold Futures (Index Constituent) Price Index 31-Dec-15 (Base value and date) 10,000 12 March ‘20 42,206.00 14,482.27 13 March ‘20 40,348.00 13,844.73

The index value on 13 March, i.e. 13,844.73 has been arrived at as 14,482.27 x  40,348/42,206.

In the same manner as above, the value of the Silver Index is also computed.
 Date Silver Futures (Index Constituent) Price Index 31-Dec-15 (Base value and date) 10,000 12 March ‘20 44,139.00 9,376.28 13 March ‘20 40,487.00 8,600.50

Using the values of the Gold Index and Silver Indices so computed, and the weights of the constituent Gold and Silver futures, the corresponding value of the Bullion Index is determined.
where, WG and WS are weights of Gold and Silver futures respectively in this sectoral index. Divisor is the adjustment factor to accommodate the annual rebalancing of weights of the Index. We assume that weights of Gold Index and Silver Index in the Bullion Index are 70 percent and 30 percent respectively and the Divisor is 1.01.

Thus, on 13 March ’20, the value of the Bullion Index would be

(13,844.73 x 0.70 + 8,600.50 x 0.30)/1.01

=12,149.96*

[*Note: For this illustration, all values have been rounded to two decimal places or to whole numbers for the sake of explanation. The actual values of the indices may vary.]
The computation of the MCX iCOMDEX index value explained above is on usual days when the index is not rolled over.

How is the index computed on rollover days? What role does the number of days of roll-over play in determining the index values on such days? Watch out this space next week …

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