GUAREX

A commodity index tracks a basket of futures. A sectoral index tracks one family inside the market rather than the market as a whole.

NCDEX GUAREX is the narrowest example in the workbook. Its family is guar: a single crop, and the gum made from it.

It has just two constituents. Guar seed and guar gum. For the year 2022-23 their weights were 59.35% and 40.65%.

One rule therefore does not apply to it. A composite index must keep every constituent between 1% and 30%. Both GUAREX legs break that ceiling — and that is allowed, because the 30% cap is only for composite indices.

Like every Indian commodity index, GUAREX is built from futures prices, not spot prices. So it is treated as a total return index.

Where it came from. SEBI's circular dated 18 June 2019 set out the construction methodology for robust commodity indices built on futures prices, for the purpose of trading their derivatives. Four indices in the workbook were created on that basis: MCX iCOMDEX, a composite of non-agricultural commodities, and three sectoral indices — NCDEX GUAREX on the guar family, MCX BULLDEX on precious metals, and MCX METALDEX on base metals.

Its weights. For 2022-23, guar seed 59.35% and guar gum 40.65%. Those two sum to 100%, because the index is nothing but the guar complex.

Which construction rules reach it. The generic ones do. A constituent's commodity futures must have been in existence for at least the last 12 months and traded on 90% of the trading days in those 12 months. Weights stay fixed for a year unless a constituent's derivatives stop trading, are reviewed and rebalanced at least once a year, and any rebalance must be disclosed at least three months before publication on the new weights. Rebalancing does not reset the index to its base value.

Which do not. The 1% minimum and 30% maximum per constituent applies in a composite index, and the workbook says plainly that in sectoral indices the 30% limit per commodity is not applicable. The liquidity screen is also composite-only: for composite indices on which derivatives are traded, a minimum 80% of index weight must comprise commodity futures whose minimum Average Daily Trading Volume is at least Rs 75 crore for agri commodities and Rs 500 crore for non-agri, with anything failing that test held below 15% weight.

Why it survived when the agri composite did not. NCDEX's AGRIDEX was a 10-commodity agri composite index in 2021. Its calculation and display were discontinued with effect from 1 February 2022, because trading in many of its constituents had been discontinued on regulatory concerns. GUAREX is built on two commodities that kept trading, which is exactly why it is still the workbook's live agri sectoral example.

Take GUAREX at an index level of 1,000 and run one month's constituent moves through the fixed weights.

So the index moves from 1,000 to 1,027.48.

Now trade it. A commodity index future starts at a base of 1,000 with a lot size of 500 units, set so that the lot is worth at least Rs 5 lakh on the launch date, and a tick size of Rs 0.25. One lot at 1,027.48 is therefore worth 1,027.48 x 500 = Rs 5,13,740, and one tick is worth 500 x 0.25 = Rs 125.

A guar gum exporter who was short 4 lots at 1,000 to hedge his physical book squares off at 1,027.48:

Loss = 27.48 x 500 x 4 = Rs 54,960

Against that, his physical guar gum stock has fallen 2% in value, so the hedge has worked badly — and the reason is the weights. Guar seed, which he does not hold, carries 59.35% of this index and rose 6%. Hedging guar gum with GUAREX is not a clean hedge, because the index is dominated by the seed rather than the gum.

Chapter 2 (Commodity Indices), sections 2.2 and 2.3, where the SEBI-approved Indian indices are listed and the construction rules set out.

Expect a classification question — GUAREX is a sectoral index, not composite — and an exchange question, since GUAREX belongs to NCDEX while BULLDEX and METALDEX belong to MCX. The two constituents and the 59.35% / 40.65% weights are straight recall. The better question tests the consequence: whether the 30% per-constituent cap applies to GUAREX, and the answer is no, because that cap belongs to composite indices.

• GUAREX is NCDEX's; BULLDEX and METALDEX are MCX's. Three sectoral indices across two exchanges, and the ownership is examined.
• Sectoral, not composite. The 1%-to-30% constituent band and the 80%-of-weight liquidity test are composite-index rules and do not apply here.
• Both GUAREX constituents exceed 30%, which is legal precisely because it is sectoral. A candidate who applies the composite cap concludes wrongly that the index is non-compliant.
• 59.35% and 40.65% are the 2022-23 weights. Commodity index weights are fixed for a year, so the year label is part of the fact.
• Do not confuse GUAREX with AGRIDEX. AGRIDEX was NCDEX's 10-commodity agri composite, discontinued with effect from 1 February 2022.
• It is built on futures prices, not spot prices, like every Indian commodity index — which is why the workbook treats it as a total return index rather than a spot index.
• Two constituents do not make a diversified hedge. Guar seed carries nearly 60% of the index, so GUAREX is a poor proxy for guar gum alone.