The last few months have witnessed the launch of two major futures trading Commodity Index Agridex & Bulldex index by the National Commodity and Derivatives Exchange (NCDEX) and Multi Commodity Exchange Agridex and Bulldex respectively.
Agridex, an agricultural futures trading index was launched on 25 May while Bulldex, a bullion futures trading index was launched almost 3 months later on 24 August.
So, what is an index? An index serves as a benchmark of the particular sector for the purpose of comparison. Its value is derived from the underlying assets and their weightage.
In the following section, we detail about both of these new indexes and their features.
The long-awaited index was finally launched with an objective to serve as a benchmark for the Indian agricultural ecosystem reflecting the broader market. It tracks and replicates the performance of only 10 liquid commodities namely soybean, chana, coriander, cottonseed oil cake, guar gum, guar seed, mustard seed, refined soy oil, castor seed, and jeera.
Similar to other indexes in our country, this is also structured as a return based agricultural index defining its value from the composition. The tracking and disseminating of real-time Agridex data will be maintained by NSE Indices Limited as a third-party service provider.
The index is formed in such a way to ensure no dominance of a single sector or commodity by using floor and caps. To further ensure diversification, no specific commodity sector can constitute over 40 percent of the total weight of the index at the launch.
This was started with a base value of 1000 and trading was allowed in contracts expiring June, July, September, and December. On the launch day, a total of 418 lots were traded with a turnover of Rs 21 crore.
What are the benefits?
– It has a low correlation with other asset classes and indices. This helps the investor with a liquid investment vehicle to diversify their portfolio. During global recessions, this sector of the economy outperforms the other investment propositions.
– This provides the investor with another option for trading and risk management at a composite level.
– Apart from commodity market veterans, the equity investors can also take advantage of this low-risk investment option.
– The performance of such an index would be relatively easier to forecast based on seasonality trends.
– The market participants are only required to have a general directional view to successfully trade in this market, unlike the equity index.
In the month of August, MCX successfully launched MCX iCOMDEX Bullion or Bulldex, the country’s first bullion index. This index tracks the performance of only two major commodities, namely gold (70.52% or 1 kg) and silver (29.48% or 30 kg).
This can be traded in the lot size of 50, which means with Re 1 movement the profit/loss is Re. 50. The market is expected to gain attention from large institutional investors and mutual funds because of its cash-settled feature. The future contracts expiring in September, October, and November are available for trading.
In addition, to attract the participants toward this new product, MCX has waved off the transaction fee for the first three months.
What are the benefits?
– With such a product, the traders and investors get a comprehensive bouquet of products in gold and silver derivatives.
– The investors need not track the two important commodities separately, giving them a chance to stay invested with a single index.
– Gold and silver act as a hedge against inflation and currency of last resort, making them an important element of your portfolio.
– Such commodities are least correlated with the other asset classes. Hence, investors can include them for the purpose of diversification in times of market distress.
– Several unique trading and arbitrage strategies can be formulated with the combination of underlying commodities along with the index futures.
AGRIDEX : https://www.youtube.com/watch?v=243uoMRd4X0
ALGO Trading Strategies : https://financeloaninsurance.com/algo-trading/