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NCDEX Agri futures index is constructed on the prices of the nearest month expiry contracts for the same basket of commodities that forms part of the NCDEX Agri spot index. The advantages of the futures index would be two fold. The futures index if looked in tandem with the spot index would convey to the market participants the returns the commodity markets are offering for one month period if they had bought the futures index. Second, since the futures index is constructed based on the futures contracts traded in the Exchange it would be updated on a real- time basis as against the spot index that is updated twice in a day.
As mentioned earlier, the NCDEX Agri futures index would have the same basket of commodities that is present in the spot index. Similar to NCDEX Agri spot index, each individual commodity would have equal weightage in the NCDEX Agri futures index. Prices of the near month futures contract of the respective commodities would be used for the construction of the index. If no futures prices are available in a particular month, the next nearest expiration month prices shall be used. Also the base period for the construction is the same for both i.e. the average of the prices that prevailed during the year 2001. Thus the spot index and the futures index would be comparable and the difference between them conveys the returns the participants can obtain if they were buying the futures index.
Futures index would witness jumps at the time of expiry of contracts that constitute the index because of the roll over cost. In order to have a smooth roll over, we propose the following method. Five days before the expiry of the contract, the futures contracts prices that constitute the index shall be reduced at the rate of 20% per day. On the same hand, the futures prices of the contracts that expire next shall be increased at the same rate. For example, the June month contracts would expire on 20th of this month. From 16th June onwards, the prices of the June month contracts (nearest expiry month contracts if there is no June month contract) will start reducing at the rate of 20% per day and July month contract prices (or the next expiry month contract prices) would increase at the same rate. Using five-day period for roll over would smoothen out the jump in the index value and a similar approach is used in Goldman Sachs Commodity Index (GSCI), one of the actively traded commodity index in Chicago Mercantile Exchange (CME). However, it should be noted that the futures index is provided to the market participants only for information and it cannot be traded. Participants of the market can view the real time movements of the futures Agri Index in our web site (www.ncdex.com) and also in the Traders’ work station under the symbol FUTEXAGRI.
