- Continuous Commodity Index (CCI): Current Construction and Calculation

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The Continuous Commodity Index can be viewed as a three-dimensional index.² In addition to averaging prices across 17 commodities (two dimensions), the Index also incorporates an average of prices across time, within each commodity.

The Continuous Commodity Index is computed using a three-step process:

1) Each of the Index's 17 component commodities is arithmetically averaged using the prices for all of the designated contract months which expire on or before the end of the sixth calendar month from the current date, except that:

1. no contract shall be included in the calculation while in delivery;
2. there shall be a minimum of two contract months for each component commodity (addingcontracts beyond the six month window, if necessary);
3. there shall be a maximum of five contract months for each commodity (dropping the most deferred contracts to remain at five, if necessary).³ The result is that the Index extends six to seven months into the future depending on where one is in the current month. For example, live cattle's average price on October 30, 1997 would be computed as follows:

                   (Dec. '97 + Feb. '97 + Apr. '98)
Cattle Average = ------------------------------------
                                  3

Soybean's average price on October 30, 1997 is:

                    (Nov. '97 + Jan. '98 + Mar. '98)
Soybean Average = ------------------------------------
                                  3

2) These 17 component averages are then geometrically averaged by multiplying all of the numbers together and taking the 17th root.

                        ___________________________________________
Geometric Average = 17 Ö Crude Avg. x Heating Avg. x ...Sugar Avg.

3) The resulting average is divided by 30.7766, the 1967 base-year average for these 17 commodities. That result is then multiplied by an adjustment factor of .8486. This adjustment factor is necessitated by the nine revisions to the Index since its inception in 1957. Finally, that result is multiplied by 100 in order to convert the Index into percentage terms:

              Current Geometric Average
Index = ------------------------------------  x  .8486  x  100
          1967 Geometric Average (30.7766)

Contract months eligible for inclusion in the Index:
Commodity (symbol) Corn (C): Soybeans (S): Wheat (W): Cattle (Live) (LC): Hogs (Lean) (LH): Gold (GC): Silver (SI): Copper (HG): Cocoa (CC): Coffee (KC): Sugar #11 (SB): Cotton (CT): Orange Juice (JO): Platinum (PL): Crude Oil CL): Heating Oil (HO): Natural Gas (NG):	Exchange CBT CBT CBT CME CME COMEX COMEX COMEX CSCE CSCE CSCE NYCE NYCE COMEX NYMEX NYMEX NYMEX	Contract Months Mar, May, Jul, Sep, Dec Jan, Mar, May, Jul, Aug, Nov Mar, May, Jul, Sep, Dec Feb, Apr, June, Aug, Oct, Dec Feb, Apr, Jun, Jul, Aug,Oct, Dec Feb, Apr, Jun, Aug, Dec Mar, May, Jul,Sep, Dec Mar, May, Jul, Sep, Dec Mar, May, Jul, Sep, Dec Mar, May, Jul,Sep, Dec Mar, May, Jul, Oct Mar, May, Jul, Dec Jan, Mar, May, Jul, Sep, Nov Jan, Apr, Jul, Oct All 12 Calendar Months All 12 Calendar Months All 12 Calendar Months

Figure 2: Continuous Commodity Index Component Commodities by Group
Group Energy: Grains and Oilseeds: Industrials: Livestock: Precious Metals: Softs:	Components Crude Oil (CL), Heating Oil (HO), Natural Gas (NG) (17.6%) Corn (C), Soybeans (S), Wheat (W) (17.6%) Copper (HG), Cotton (CT) (11.8%) Live Cattle (LC), Lean Hogs (LH) (11.8%) Gold (GC), Platinum (PL), Silver (SI) (17.6%) Cocoa (CC), Coffee (KC), Orange Juice (JO), Sugar (SB) (23.5%)

Arithmetic vs. Geometric Averaging

The Continuous Commodity Index involves both geometric and arithmetic averaging techniques. Geometric averaging has the statistically attractive property that successive percentage changes in a component's price do not alter that component's relative weight in the Index. Arithmetic averaging, on the other hand, causes the relative weight of a component to increase (or decrease) as that component appreciates (or depreciates) in value. The implications of these differences in index computation techniques may be seen in Figure 3, which reflects four different price scenarios. For convenience, assume that the index is comprised of only three components - X, Y, and Z - and that these components are equally weighted. The base period for each scenario is assumed to be 100.

Figure 3 demonstrates several important properties of geometric and arithmetic averages:

1. Equal component changes give equal index changes for both geometrically and arithmetically averaged indexes.
2. Geometrically averaged indexes rise slower and fall faster than arithmetically averaged indexes.
3. The impact from equal, successive percentage changes in one element is constant for geometric averages, but increases with rising prices and decreases with falling prices for arithmetic averages.

Figure 3: Arithmetic Averaging vs. Geometric Averaging
				Type of Index
				Arithmetic	Geometric
	Variable Prices			Index Value/	Index Value/
	X	Y	Z	% Change	% Change
Base Values:	100	100	100	100	100
Scenarios:
1) Raise all prices by 10% for 2 periods	110	110	110	110 (10%)	110 (10%)
	121	121	121	121 (10%)	121 (10%)
2) Lower all prices by 10% for 2 periods	90	90	90	90 (-10%)	90 (-10%)
	81	81	81	81 (-10%)	81 (-10%)
3) Raise one price by 10% for 3 periods	110	100	100	103.3 (3.3%)	103.2 (3.2%)
	121	100	100	107.0 (3.6%)	106.6 (3.2%)
	133	100	100	111.0 (3.7%)	110.0 (3.2%)
4) Lower one prices by 10% for 3 periods	90	100	100	96.7 (-3.3%)	96.5 (-3.5%)
	81	100	100	93.7 (-3.1%)	93.2 (-3.5%)
	73	100	100	91.0 (-2.9%)	90.0 (-3.5%)

Thus, a 10% increase in one of the Index's individual commodity averages, all others held constant, will always cause the Continuous Commodity Index itself to increase by 0.46%; and a 10% decrease in one of the Index's individual commodity averages, all others held constant, will always cause the Continuous Commodity Index itself to decrease by 0.50%. However, the impact on an individual commodity average from a 10% increase or decrease on an individual month will vary according to the level of that month relative to the other months in the average of that commodity.

17 Commodity Components

The Continuous Commodity Index is widely viewed as a broad measure of overall commodity price trends because of the diverse nature of the 17 commodities of which it is comprised. As a broad measure of commodity price trends it serves as an excellent price measure for macro-economic analysis. This reflects the fact that a more diverse price index contains more information and, thus, can be used to better analyze economy-wide market forces.

Equal Weighting

Equal weighting is used for both arithmetic averaging of individual commodity months and for geometric averaging of these 17 commodity averages. From a pricing point of view, equal weighting is attractive because no single month or commodity has undue impact on the Index. This makes it harder to manipulate the Index and means that the Index is less subject to the discontinuities associated with temporary supply and demand imbalances in any one month or commodity.

Intra-Day Reporting of the Continuous Commodity Index

Values of the underlying Continuous Commodity Index are computed by Bridge Information Systems, Inc., and disseminated by the New York Futures Exchange every 15 seconds during the trading day.

Only settlement and last-sale prices are used in the Index's calculation, bids and offers are not recognized - including limit-bid and limit-offer price quotes. Where no last-sale price exists, typically in the more deferred contract months, the previous day's settlement price is used. This means that the underlying Continuous Commodity Index may lag its theoretical value. This tendency to lag is evident at the end of the day when the Index value is based on the settlement prices of the component commodities, and explains why the underlying Continuous Commodity Index often closes at or near the high or low for the day.

Futures Markets

In recent years investors have been seeking new asset classes in which to diversify their holdings, improve returns, reduce risk and hedge against inflation. Commodity futures qualify on all counts.

Futures markets have been transformed in recent years as new products have been developed, new markets opened in other countries and as government regulation has made them more acceptable.

Commodities As An Asset Class

As the world markets continue their evolution toward one global marketplace, the advent of financial futures trading has had much to do with that unification. The popularity of financial futures has removed some of the stigmas and fears that were associated with the perceived rough and tumble world of commodities. Previously, commodity futures were considered too risky for investors looking for the stability associated with a traditionally diversified portfolio. But now, with money managers searching the globe for additional investment opportunities, commodities have fallen under the spotlight. The advantages of asset diversification have uncovered this area of investment as the newest tool which will enable investors to better handle their long term exposure to the up and down movements inherent in today's markets. By allocating some of their investment dollars to commodities, investors are better able to obtain desirable long term results, while at the same time lowering the overall volatility of their portfolio.

Diversification into commodities allows the portfolio to attain a more balanced inventory of assets. Whether or not high levels of inflation resurface, the allocation of a percentage of investable funds into an asset that will successfully lower the overall volatility of a portfolio, while improving the annual performance, is every investors goal.

The counter-cyclic nature of commodities to financial assets makes commodities an ideal asset class to incorporate into a portfolio to achieve a more desirable return scenario. Should inflation remain under control, the commodity portion of a properly allocated portfolio may lag other asset classes, but that lag will indicate that the other non-commodity assets performed well. This is historically true because low to moderate inflation periods allow for the stable environment in which traditional financial assets have performed well. In such a case, the commodity allocation would have served its purpose as a counter-cyclic asset to the rest of the portfolio.

The Continuous Commodity Index and Continuous Commodity Index Futures

How is diversification into commodities best accomplished? Attempting to find the right combination of contracts in obscure markets such as soybeans, gold, cattle, coffee, and crude oil would be difficult for a futures market professional and potentially disastrous for anyone else. Many mutual type commodity funds and money managers have surfaced, but most with unpredictable results, and very few offering the true commodity portfolio necessary for the proper asset diversification.

The Continuous Commodity Index has been recognized as the main barometer of commodity prices for many years. Globally, the Continuous Commodity Index is the accepted standard for measuring the commodity futures price level. It is the most widely followed commodity index by the financial press around the world, and is found somewhere on almost every trader's quote terminal. This fact alone can cause changes in the price level of the Index to create an immediate impact on other markets such as stocks, bonds, and currencies.

To alleviate the need to choose individual commodities while facilitating the investment in a representative group, the New York Futures Exchange, Inc., began offering, in 1986, futures contracts on the Continuous Commodity Index.

Buyers of the Continuous Commodity Index futures contract have direct participation in valuation changes of the component commodities. This 'long' position provides opportunities for obtaining a hedge against commodity inflation and reaping potentially extraordinary returns from commodity price appreciation.

Figure 4: Continuous Commodity Index Futures Contract Specifications
Contract Quote:	Index Points, e.g., 240.00, 240.05
Trading Symbol:	CR
Contract Size	$500 X Index
Futures and Value:	(e.g., futures at 240.00 are valued at $120,000: $500 X 240.00).
Trading Cycle:	January, February, April, June, August and November.
Trading Hours:	9:40 a.m. - 2:45 p.m.(Open/Close)N.Y. Time on all Exchange business days, except that trading in all contract months on the last trading day of each expiration month shall be from 9:40 a.m. to 3:15 p.m. (N.Y. time).
Minimum Price Fluctuations (Tick Size):	.05 (5 basis pts.)= $25.00, e.g., 240.05, 240.10, 240.15
Daily Price Limits:	None
Position Limits:	5,000 contracts net long or short.
Last Trading Day:	Second Friday of the expiration month.
Contract Settlement:	Settlement at contract maturity is by cash payment.

Continuous Commodity Index Portfolio Performance

In 1993, the New York Futures Exchange commissioned a study by Powers Research Associates L.P., to perform valuation and correlation studies on the Continuous Commodity Index and other asset classes and inflation indicators.

To measure the effect an investment in commodities would have on a typical portfolio the Continuous Commodity Index was used as a surrogate for a selection of individual commodity futures contracts. Since a futures contract has been trading on the Continuous Commodity Index since 1986, the commodities allocation of the portfolio (Continuous Commodity Index Account) was calculated at 10% cash for supporting a long position in Continuous Commodity Index futures, with the remaining 90% of the Continuous Commodity Index contract value invested in Treasury Bills. This two-part allocation simulates actual futures investment where excess margin funds are typically invested in interest bearing securities.

The results of the study indicated:

1. Adding a Continuous Commodity Index Account allocation to an efficient portfolio representative of existing institutional portfolios has a positive impact on the portfolio's Sharpe Ratio.
2. This positive impact is most clearly evident at Continuous Commodity Index Account allocations between 2.5% and 20% and clearly disappears at allocations above 40%.
3. This positive impact is seen if the Continuous Commodity Index contribution (not including T-Bill return from margin) is as small as 0.25%.
4. The Continuous Commodity Index Account was an excellent offset against inflation over the entire period and most shorter sub-periods studied.
5. A continuous fully collateralized buy and hold passive investment in Continuous Commodity Index futures, in the period June 1986 through December 1992, would have reaped a total return of 33.90%, or an annual return of 4.59%. The GDP Deflator as an indication of inflation during that same period averaged 3.10%.

The conclusion is that allocating Continuous Commodity Index futures to a typical institutional portfolio is beneficial to portfolio performance. Furthermore, even if Continuous Commodity Index Account return is low (perhaps as low as 0.25% annually) its inclusion is beneficial in improving the Sharpe ratio.

Figure 5: Continuous Commodity Index (1967=100) compared with the Consumer Price Index (1982=100)

The chart shows the close correlation between the Continuous Commodity Index (solid line), the CRB Spot Index (dashed line), and the Consumer Price Index (dotted line). Notice that major trend changes in the Continuous Commodity Index have consistently preceded slope changes in the Consumer Price Index trendline by approximately 12 months.

Figure 6: A comparison of the Continuous Commodity Index and the CPI on a "rate of change" basis.

The strong correlation between the two indexes is more dramatically demonstrated. Note that the major turns in the Continuous Commodity Index have consistently led those in the CPI.

Figure 7: A "rate of change" chart comparing movement in the Continuous Commodity Index and long-term Treasury Bond yields.

Besides the strong positive correlation, the Continuous Commodity Index has often been a leading indicator of interest rate yields.

² An example of a one-dimensional product would be gold or corn; an example of a two-dimensional product would be the NYSE Composite Index®.

³ It is important to note that certain commodity markets, like crude oil, heating oil, natural gas and sugar, cease trading the month prior to delivery (e.g. May Crude stops trading in April).