Sectoral indices will change the way you track commodities
26 Jul 2021
To guide market participants in assessing the performance of soy and gaur complex, the National Commodity and Derivatives Exchange (NCDEX) has decided to launch India’s first two sectoral indices in the agri-commodities space – GAUREX and SOYDEX. The methodology document for both the indices is currently available on the exchange’s website. Trading of these index futures may start in the next few weeks.
What are GAUREX and SOYDEX?
Both are price-based indices. GUAREX shall track the price movement in the futures contracts of guar gum refined splits and guar seed on a real-time basis. The weightage of guar gum refined splits will be 36.57 per cent and guar seed will be 63.43 per cent. Similarly, SOYDEX will fluctuate as per the price changes in futures contracts of refined soy oil and soybean. The weightage of refined soy oil will be 32.08 per cent and soybean will be 67.92 per cent.
Advantages of trading in GUAREX and SOYDEX
There are numerous advantages in trading GUAREX and SOYDEX futures. First and foremost, they will offer a lot of opportunities to value chain participants regarding risk management as well as trading strategies. As both are cash-settled contracts, these indices can be considered as compatible products for hedgers who are often willing to trade in low-cost products. SEBI’s cross margin benefit will further offer a significant reduction in transaction when using GAUREX and SOYDEX futures.
Another potential advantage will be that portfolio managers and professional traders will be able to tap excellent pair trade opportunities in the spreads as well as arbitrages.
These indices will also be beneficial in simplifying the research process. Instead of tracking the respective fundamentals and developments of individual commodities, it will be convenient for investors and traders to follow a single index and initiate trades accordingly.
Being cash-settled contracts, traders and investors can continue holding the futures till expiry, without the risk of receiving deliveries. Also, there would not be involvement of additional margins during the tender period of commodity futures i.e. usually between the 11th and 20th of every month.
These index futures will be able to enhance the market segment since it will be beneficial for equity clientele as well. Equity-based investors and traders will be able to gain exposure to commodities: In one way they will be able to diversify their risk, without tracking the soy complex or guar complex markets. Overall these indices will be an easy way to gain exposure in the commodity markets for all the retail traders/investors who do not or are unwilling to store/sell soy oil, soybean/ guar seed, or guar gum in the physical markets. In overseas markets, the tendency for investors to diversify from equity-based products to commodities through participation in the agricultural index futures has already started increasing.
The margin requirement for trading will be quite lesser for individual commodities. During trading in agricultural commodity futures, there are frequent changes in the percentage and usually, the total margins range between 13-15 per cent. But in the case of index futures, the percentage is unlikely to exceed 10 per cent. Therefore, futures participants will be able to trade with approximately 30-50 per cent lower margins than individual futures contracts.
(The author is Senior Research Analyst – Agri Research, Religare Broking Ltd. Views are his own)