Classroom Corner

Thomson Reuters and Multi Commodity Exchange of India (MCX) launched their co-branded commodity index series last month.

Six indices were launched — one composite index (MCX iCOMDEX Composite), two sector indices (MCX iCOMDEX Base Metals and MCX iCOMDEX Bullion) and three single commodity indices (MCX iCOMDEX Gold, MCX iCOMDEX Copper and MCX iCOMDEX Crude Oil).

Composite index

The MCX iCOMDEX Composite index is a combination of agri, energy, bullion and metals.

The 11 commodities in the index are crude palm oil, cotton, crude oil, natural gas, aluminium, copper, lead, nickel, zinc, gold and silver.

Crude oil, which has the highest weightage (35.21 per cent), and bullion (gold and silver) together account for 33.42 per cent of the index.

The weights are assigned based on the commodity’s liquidity and physical size. The movement in the composite index may help market participants form a composite view of the direction of the domestic commodity market.

Sector indices

Sector indices can aid participants to give an idea on the specific sector movement. For instance, the MCX iCOMDEX Base Metals index give an inkling of where base metals are headed. This index comprises five base metals — aluminium, copper, lead, nickel and zinc. Copper with 29.54 per cent and zinc with 26.37 per cent are the top two commodities in terms of weight in the index.

The MCX iCOMDEX Bullion is the second sector index that includes gold (66.42 per cent weightage) and silver (33.58 per cent weightage).

Historical data

Historical closing price data for these indices since December 30, 2011, is available on the MCX website. However, the open, high, low and close prices are available from September 11, 2017, only. Traders can use the historical data to analyse and forecast the trend in the indices and formulate a trade strategy.

Index rebalancing

These indices will be rebalanced once a year before the start of the January roll-over of all commodities. The rebalanced weightage and change in the commodities in the index would be notified by the month of November in the preceding year.

A commodity contract will be eligible for entering into the index only if it has a minimum average daily turnover of ₹50 crore, with a trading history of at least one year.

Uses

The introduction of these indices can help the market participants gauge how the domestic commodity sector is performing.

It can also help traders take trade calls. For instance, a trader in bullion can follow the trend in the MCX iCOMDEX Bullion index.

The trader can take trade positions in gold and silver based on the pattern or trend spotted in the index. Similarly, any significant indication like a trend reversal or a pattern formation on the MCX iCOMDEX Base Metals index can be taken as a cue to take trades in base metals.

However, caution is required as the index can just give an indication and the actual movement in the specific commodity may or may not reflect the same movement as the index due to its weightage in the index.

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