BASIC TECHNIQUES
As The Markets Shift
The Goldman Roll
by Scott Barrie and Kevin Warner
Does it affect the commodities markets?
The Goldman Sachs Commodity Index (GSCI)
is a world production-weighted index that measures commodity market returns.
The quantity of each commodity in the index is determined by the average
quantity of production in the last five years. The GSCI is composed of
commodities from all sectors. As you can see from Figure 1, energy, metals,
and agriculture are all represented. The variety of commodities ensures
the GSCI is well diversified, both across subsectors and within each subsector.
The GSCI encompasses a passive portfolio of long positions in the nearest-to-expiration
futures contracts. Unlike a passive portfolio in equities, a passive one
in futures contracts requires regular transactions because, of course,
futures contracts expire. To avoid any possible deliveries, futures close
to expiration are rolled forward -- that is, exchanged for contracts with
the next closest expiration date -- during the month preceding the contract
month.
To avoid any undue influence of the commodity futures markets, the GSCI
is rolled over in 20% increments starting on the fifth business day and
continuing through the ninth business day of the month preceding the expiration
date. In other words, one-fifth of the index is rolled over by the end
of the sixth business day, and two-fifths by the seventh business day.
The rollover is completed by the ninth business day.
Several firms do arbitrage work to keep the GSCI in line (though they
don't hold a portfolio of futures to replicate the index), as the GSCI
is the base for many other products. Hence, the rollover period of the
GSCI can have an effect on some commodities markets.
Figure 1: The Goldman Sachs Commodity Index. The GSCI
is made up of commodities from all the commodity sectors.
...Continued in the August 2003 issue of Technical Analysis of
STOCKS & COMMODITIES
Excerpted from an article originally published in the August 2003
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2003, Technical Analysis, Inc.
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