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What is Commodity Price Index?
A commodity price index is a fixed Mandan weight index or (weighted) average of selected commodity prices, which may be spot or futures prices. It is designed to be representative of the broad commodity asset class or a specific subset of commodities, such as energy or metals.
The constituents in a commodity price index can be broadly grouped into the following categories:
Energy
Metals
Base Metals
Precious Metals
Agriculture
Grains
Softs
Livestock
Investors can choose to obtain a passive exposure to these commodity price indices through a total return swap. The advantages of a passive commodity index exposure include negative correlation with other asset classes such as equities and bonds, as well as protection against inflation. The disadvantages include a negative roll yield due to contango in certain commodities, although this can be reduced by active management techniques, such as reducing the weights of certain constituents (e.g. precious and base metals) in the index.
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