Commodity Indices

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More units in NISM Series XVI

• Introduction to Commodity Markets15
• Commodity Futures22
• Commodity Options22
• Uses of Commodity Derivatives23
• Trading Mechanism13
• Clearing Settlement and Risk Management of Commodity Derivatives20
• Accounting and Taxation8
• Legal & Regulatory Environment of Commodity Derivatives8
• Code of Conduct and Investor Protection Measures7

Practise all of NISM Series XVI

Exam format

All 12 questions on Commodity Indices, with answers

1. Q1An index is constructed from several specified commodity futures contracts. What does a change in that index principally summarise?

   • A

     Option A. The market value of all commodity companies’ shares

     Why it is wrong: An equity-sector index would use shares, not the stated futures.

   • B

     Option B. The combined corporate profits of commodity producers

     Why it is wrong: Corporate profit is not a price series of commodity futures.

   • C

     Option C. The physical tonnage stored in every Indian warehouse

     Why it is wrong: The index does not count all stored physical tonnes.

   • D

     Option D. The performance of its selected commodity-futures exposures — Correct answer

   Answer: D. An index must be interpreted according to its constituents and construction method. The specified constituents are futures contracts, so movements summarise those selected market exposures. Producer equity values, profits and warehouse quantities are different variables. They may relate economically to commodities but are not the stated constituent prices. Remember: Identify what is in the index before interpreting what its movement means.

   Hint, shown before you answer in practice mode: Common mistake: Assuming a commodity index is an index of commodity-producing shares.

   XVI-031easyconceptual

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2. Q2A hypothetical index has beginning-period weights of 50% in metal, 30% in energy and 20% in an agricultural future. Their period returns are +4%, −2% and +5%. With no rebalancing or other adjustments, what is the index return?

   • A

     Option A. 1.40%

     Why it is wrong: This omits one percentage point of the agricultural contribution.

   • B

     Option B. 3.00%

     Why it is wrong: This does not apply all the given weights and signs correctly.

   • C

     Option C. 2.33%

     Why it is wrong: This is the unweighted average of the three returns, rounded.

   • D

     Option D. 2.40% — Correct answer

   Answer: D. A portfolio-style index return weights each constituent return by its beginning-period share of exposure. Metal contributes 0.50 × 4% = 2 percentage points. Energy contributes 0.30 × (−2%) = −0.6 point. Agriculture contributes 0.20 × 5% = 1 point. Total return = 2 − 0.6 + 1 = 2.4%. The weights add to 100%. Remember: Weight returns, not the number of constituents.

   Hint, shown before you answer in practice mode: Common mistake: Averaging constituent returns equally when their index weights differ.

   XVI-032mediumnumerical

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3. Q3A commodity index rises from 2,400 to 2,520. What is its percentage increase?

   • A

     Option A. 120%

     Why it is wrong: 120 is the change in points, not percent.

   • B

     Option B. 4.76%

     Why it is wrong: This divides the point change by the ending level.

   • C

     Option C. 5% — Correct answer

   • D

     Option D. 0.05%

     Why it is wrong: This expresses the decimal return 0.05 incorrectly as 0.05%.

   Answer: C. An index-level change becomes a return only after division by the starting index level. The increase is 120 index points. Percentage return = 120 ÷ 2,400 × 100 = 5%. Dividing by the ending value would answer a different question. Remember: Index points and percent returns use different units.

   Hint, shown before you answer in practice mode: Common mistake: Using the final index level as the denominator for a simple holding-period gain.

   XVI-033easynumerical

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4. Q4Why does a continuing commodity-futures index generally need a published roll methodology?

   • A

     Option A. Its futures expire, so exposure must move to the designated later contracts — Correct answer

   • B

     Option B. A roll changes all of the index’s futures into shares of the exchange itself

     Why it is wrong: A roll replaces futures exposures and does not create exchange equity ownership.

   • C

     Option C. Futures prices stop changing after their first trading day and must be replaced

     Why it is wrong: Futures prices remain market-driven during their life.

   • D

     Option D. A roll removes every possible source of tracking difference for the index

     Why it is wrong: Tracking differences can still arise from costs, timing and implementation.

   Answer: A. An ongoing index has a longer life than each expiring constituent futures contract. A roll method identifies when and how exposure moves from expiring contracts to later designated contracts. The later contract may have a different price, and execution, weighting and return treatment matter. The roll is therefore part of the index methodology rather than a cosmetic name change. Remember: An ongoing futures benchmark requires an explicit way to handle expiry.

   Hint, shown before you answer in practice mode: Common mistake: Assuming an index can hold the same expiring future forever.

   XVI-034mediumconceptual

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5. Q5A cable maker buys only copper. It considers hedging with a base-metal index that also includes other metals. What is the main matching concern?

   • A

     Option A. The index must have exactly the same return as copper

     Why it is wrong: A basket with other metals need not replicate copper.

   • B

     Option B. The index may move differently from the maker’s copper purchase cost — Correct answer

   • C

     Option C. The presence of several metals removes the need to size the hedge

     Why it is wrong: A hedge still requires a quantity or sensitivity calculation.

   • D

     Option D. A futures index necessarily provides physical copper delivery

     Why it is wrong: An index exposure does not itself specify delivery of the maker’s required copper.

   Answer: B. A diversified benchmark can introduce cross-commodity basis risk for a concentrated physical exposure. Copper is only part of the index. Other constituent prices and the weighting method can move the index differently. The maker must examine exposure sensitivity, quantities, timing and contract terms. Diversification within the index does not guarantee an exact hedge of a single input. Remember: A broader index is not automatically a closer hedge for a narrow business exposure.

   Hint, shown before you answer in practice mode: Common mistake: Confusing index diversification with perfect exposure matching.

   XVI-035mediumconceptual

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6. Q6Which description matches the broad S&P GSCI in the index provider’s official overview?

   • A

     Option A. A physical-inventory count with no futures-price inputs

     Why it is wrong: Physical production informs weighting, but the benchmark measures performance through futures.

   • B

     Option B. A bond index weighted by government debt outstanding

     Why it is wrong: Government debt is not the commodity-futures universe.

   • C

     Option C. A production-weighted commodity-futures benchmark — Correct answer

   • D

     Option D. An equal-weighted index of mining-company shares

     Why it is wrong: Neither the equity constituents nor equal weighting matches the official description.

   Answer: C. A named benchmark should be recognised by both its asset exposure and weighting principle. The provider describes S&P GSCI as a broad commodity-market benchmark using liquid commodity futures and production weighting. This does not imply equal sector weights or constant constituent weights. The current methodology governs eligibility and calculation. Remember: Distinguish a weighting input such as production from the prices whose performance is measured.

   Hint, shown before you answer in practice mode: Common mistake: Assuming production-weighted means the index is a simple tonnage count.

   XVI-036easyconceptual

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7. Q7The official MCX BULLDEX overview identifies which underlying commodity-futures combination?

   • A

     Option A. Crude oil and natural-gas futures

     Why it is wrong: These are energy commodities, not bullion constituents.

   • B

     Option B. Shares of gold-mining and silver-mining companies

     Why it is wrong: The index tracks commodity futures rather than producer shares.

   • C

     Option C. Gold and silver futures — Correct answer

   • D

     Option D. Copper and zinc futures

     Why it is wrong: Copper and zinc are base metals rather than the specified bullion pair.

   Answer: C. A sector commodity index provides exposure to its specified futures constituents, not to similarly named companies. The MCX product overview identifies gold and silver futures as the bullion exposure. This question does not require memorising current constituent weights, contract lot sizes or index-futures specifications, all of which require the applicable product documents. Remember: Bullion futures exposure is different from a portfolio of bullion-company equities.

   Hint, shown before you answer in practice mode: Common mistake: Reading a sector name without checking the actual underlying instruments.

   XVI-105easyconceptual

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8. Q8In the S&P GSCI methodology, what component distinguishes the total-return description from the commodity-futures excess-return description?

   • A

     Option A. Interest on the funds hypothetically committed to the investment — Correct answer

   • B

     Option B. Dividends paid out by every underlying commodity in the index

     Why it is wrong: Physical commodities do not pay corporate dividends merely by being index constituents.

   • C

     Option C. A guarantee that every futures roll produces a gain for the index

     Why it is wrong: Rolling may help or hurt returns, and neither series guarantees gains.

   • D

     Option D. Removal of every negative constituent return from the calculation

     Why it is wrong: A return series does not discard losses to ensure a positive result.

   Answer: A. Return-series labels can include different cash-flow components even for a common futures exposure. The methodology describes excess return through the commodity futures portfolio’s contract returns. Total return also includes interest on hypothetical committed funds. This does not imply that physical commodities pay dividends or that a total-return series cannot fall. The precise methodology controls the calculation. Remember: Compare like-for-like return series before comparing index performance.

   Hint, shown before you answer in practice mode: Common mistake: Comparing total return with excess return and attributing the entire difference to commodity prices.

   XVI-106mediumconceptual

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9. Q9A hypothetical commodity-index future has a multiplier of ₹50 per index point. A trader buys 4 contracts at 3,200 and closes at 3,170. Ignoring costs, what is the cumulative result?

   • A

     Option A. ₹1,58,500 loss

     Why it is wrong: This is a notional-like amount using the final index level rather than its change.

   • B

     Option B. ₹6,000 profit

     Why it is wrong: This reverses the sign of a long position’s loss.

   • C

     Option C. ₹1,500 loss

     Why it is wrong: This includes only one contract.

   • D

     Option D. ₹6,000 loss — Correct answer

   Answer: D. Index-futures profit depends on the change in index points and the contract’s cash multiplier. Point change = 3,170 − 3,200 = −30. Result = −30 × ₹50 × 4 = −₹6,000. The multiplier is a rupee value per point, not a weight in tonnes or kg. Remember: Index points become money through the stated contract multiplier.

   Hint, shown before you answer in practice mode: Common mistake: Treating an index point as one rupee regardless of the specification.

   XVI-107mediumnumerical

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10. Q10An index changes constituent quantities while market prices stay fixed. Why might its methodology adjust a divisor or normalising constant at that change?

    • A

      Option A. To convert futures prices into company dividends

      Why it is wrong: No dividend rights arise from altering a calculation constant.

    • B

      Option B. To guarantee that every constituent earns the same return

      Why it is wrong: Constituents can have different returns and weights.

    • C

      Option C. To erase genuine subsequent market-price losses

      Why it is wrong: A continuity adjustment is not a promise to suppress actual market losses.

    • D

      Option D. To avoid an artificial jump caused only by the composition change — Correct answer

    Answer: D. An index should distinguish market movement from a mechanical change in its construction. Changing quantities can change the unadjusted aggregate even without any market-price movement. A continuity adjustment can preserve a comparable index level across that event. Later market gains and losses still affect the index normally. Remember: A divisor adjustment preserves measurement continuity, not investor wealth by itself.

    Hint, shown before you answer in practice mode: Common mistake: Treating a methodology adjustment as an economic trading profit.

    XVI-108mediumconceptual

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11. Q11A hypothetical index has 10 constituents. One energy contract has 40% weight and falls 5%, while every other constituent is unchanged. What is the index return under the given weighted-return method?

    • A

      Option A. +2%

      Why it is wrong: This reverses the direction of the constituent’s contribution.

    • B

      Option B. −5%

      Why it is wrong: This treats the one constituent as the whole index.

    • C

      Option C. −2% — Correct answer

    • D

      Option D. −0.5%

      Why it is wrong: This assumes an equal 10% weight merely because there are 10 constituents.

    Answer: C. The effect of a constituent depends on its weight, not simply on how many names appear in the basket. The moving constituent contributes 0.40 × (−5%) = −2 percentage points. All other contributions are zero. Having 10 constituents does not make their weights equal or remove concentration in the 40% position. Remember: Count weights, not just names, when assessing index concentration.

    Hint, shown before you answer in practice mode: Common mistake: Equating the number of constituents with effective diversification.

    XVI-109mediumnumerical

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12. Q12A futures-based commodity index and a spot-price series track the same commodity name but earn different annual returns. Which explanation should be investigated before concluding that the index is incorrectly calculated?

    • A

      Option A. Contract selection, rolls and the return-series methodology — Correct answer

    • B

      Option B. Whether a positive spot return forces all futures strategies to match it

      Why it is wrong: A common commodity name does not imply identical returns across spot and rolled futures.

    • C

      Option C. Whether futures roll transactions automatically create dividends

      Why it is wrong: A roll does not cause the commodity to pay a dividend.

    • D

      Option D. Whether an index is required to ignore all financing conventions

      Why it is wrong: Different return series may explicitly include or exclude interest components.

    Answer: A. A rolled futures exposure is not identical to a continuous holding represented by a spot-price series. The index may hold specified expiries, roll them at defined times and incorporate a particular return convention. These choices can make its returns differ from a simple spot-price change. This is a reason to reconcile methodologies, not an excuse to ignore genuine tracking or calculation errors. Those require comparison against the correct benchmark rules. Remember: Compare the actual exposure path and return definition, not just the commodity label.

    Hint, shown before you answer in practice mode: Common mistake: Assuming that a futures-index return must equal the headline spot-price return.

    XVI-110hardconceptual

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Uses of Commodity Derivatives

23 questions on Uses of Commodity Derivatives. Its quiz opens on that unit.