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.
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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