26.9 A PRIMER ON COMMODITY INDEX CALCULATION: SPOT, ROLL, EXCESS, AND TOTAL RETURNS
The four measures of return that are commonly published by commodity index providers are spot return, roll return, excess return, and total return. Each of these measures of commodity performance has an important use in evaluating the performance of different commodity investment strategies. This section introduces these concepts by calculating a hypothetical commodity index over the course of two trading days. The sections that follow focus on analysis of these return measures. Three index values are calculated: excess return index, total return index, and spot index. The industry convention is to compute index returns in the following way.
Spot return: Percentage change in market value of futures contracts held in the index at the end of the day, after accounting for any index changes. The following expression describes the spot index at time t – 1:
The following expressions describe the spot index at time t for the three different possible states of the index:
where wi′ = new number of contract i in the index.
At time t, the spot index is calculated as a weighted sum of futures prices. However, ...