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All About Commodity Indices

Commodity Indices solves most of the challenges faced by commodity traders who trade in single commodity.

(a) Whose positions and margins are concentrated in single commodity, to trade one lot of copper or nickel margin requirement is more than 2 lakh rupees per lot, for Gold 1 kg or Silver 30 kg contract margin requirement is 5 lakhs and 2.5 lakhs respectively.

(b) Similarly margin requirement for Lead, Zinc and Aluminium is approx. Rs 1 lakh per lot

(c) There have been many changes in margining on crude oil post it hit negative price in April 2019.

More over all Bullion and Base Metal contracts are compulsory delivery contracts. It means one has to square off his / her positions before they move in to staggered delivery period.

There are 10 advantages of trading in Commodity Indices

  • Indices are good tool for Portfolio Diversification
  • Risk Diversification
  • One can take position in multiple commodities through a single contract
  • Simple and Easy to trade – They are traded as futures contracts
  • Mid-sized contracts – Value of contract between 5 lakhs to 10 lakhs
  • They are cash settled – No delivery or tender period margins unlike single commodities in Bullion and Base Metals, which are compulsory delivery contracts
  • Very liquid underlying contracts. BULLDEX – Gold 1 kg and Silver 30 kg, METLDEX – 5 base metals and ENRGDEX – Crude Oil and Natural Gas.
  • You can have arbitrage opportunities between Indices and underlying single commodities
  • Efficient price discovery with a tight bid-ask spread
  • Above all, low breakeven or low trading cost – with favourable 4 tick’s movement one can be profitable includes brokerage and all other regulatory costs @ ICICIDirect

 

Let’s understand about the Indices

These commodity indices BULLDEX, METLDEX and ENRGDEX work in similar lines as NIFTY and Bank Nifty futures traded in equity derivatives markets and are cash settled.

Sectorial index values like BULLDEX, METLDEX and ENGRDEX are arrived based on weighted average of single commodity indices. Weights are based on two things

(a)    Based on physical market size of last 5 years, which has 25% weightage

(b)    Based on liquidity of underlying single commodity futures in last 12 months, which has 75% weightage

Indices are computed and disseminated in real-time basis.

BULLDEX:

It’s composition is weighted average of MCX Gold 1 Kg and MCX Silver 30 Kg contract at a ratio of 66.66% and 33.34%.

Few fundamental factors for trading in BULLDEX

  • BULLDEX has inverse correlation with US dollar
  • Precious metals act as safe heaven assets during economic crisis
  • It has low or negative correlation with equities in long run
  • If gold prices are moving up, it can become a lead indicator for BULLDEX to buy as 66.6% is gold in BULLDEX

 

METLDEX:

It has composition of 5 base metals traded on MCX. Copper 35%, Nickel 32%, Zinc 16%, Aluminium 12% and Lead 5% (All weightage percentages rounded off to nearest number).

Metal Index can be used by manufacturing sector as a benchmark

ENRGDEX:

It constitutes of heavily traded energy products on MCX with respective weightages of Crude Oil - 75% and Natural Gas - 25%

MCXENRGDEX is an efficient tool for investors looking to manage their investments in energy sector.

This ratio of index composition for all three Indices will remain same for the entire year. Rebalancing happens once a year and will be announced in Oct and implemented from January of every year.

 

 

MCXBULLDEX

MCXMETLDEX

MCXENGRDEX

Underlying Constituents

Gold 1 Kg and Silver 30 Kg

Aluminium, Copper, Lead, Nickel & Zinc

Crude Oil & Natural Gas

Trading Unit

50 Times

50 Times

125 Times

Trading Unit

Mondays through Fridays, 9 am to 11.30/11.55 pm
*Based on US daylight saving time period

 

 

 

 

Margins*

Approx. 5 - 6%

Approx. 6 - 7%

Approx. 15 - 17%

Rick Size

Re 1/-

Settlement

Cash Settled

Final Settlement

Weighted average of underlying commodities between 4 pm to 5 pm on 7th day before expiry day of underlying contract

Client OI Limits

1000 lots or 5% of OI, whichever is higher of BULLDEX

1000 lots or 5% of OI, whichever is higher of METLDEX

1000 lots or 5% of OI, whichever is higher of ENGRDEX

 

To sum up, Commodity Index in general looks attractive investment and trading tool for retail traders, who would like to avoid a single commodity exposure by allocating huge margin. Commodity indices are best bet to diversify risk with low margins and most importantly they are all cash settled.