The granddaddy of commodity indexes is the KR-CRB Futures Price Index. The initials stand for Knight-Ridder Commodity Research Bureau. Developed in 1957, The KR-CRB Index was designed to monitor the broad-based price movement of the commodity market as a whole. It answers an important question, i.e., “Are commodity prices going up or down at any given point in time?” It is made up of futures contracts on the following commodities:

• Meats—cattle, hogs, pork bellies
• Metals—gold, silver, platinum
• Imports—coffee, cocoa, sugar
• Industrials—crude oil, cotton, copper, unleaded gas, heating oil, lumber
• Grains—corn, wheat, soybeans, soybean oil, soybean meal
• Miscellaneous—orange juice

None of the financial markets were included since they did not exist in the ’50s. Since it does include physical commodities, which are so heavily influenced by inflation and deflation, bond traders love its inverse correlation with their market. Read more »

Posted: March 10th, 2008 under Futures Contracts, Futures Prices.
Comments: 4

A common complaint of anyone who buys insurance is that it wasn’t needed—the house never burned down, the car never was stolen, etc. But few of us want to assume the risk that nothing unpleasant will ever happen, so we go ahead and buy the insurance.

The same goes for the futures markets. Hedgers buy insurance from speculators. A premium is paid for that insurance, which is the economic raison d’etre of the futures market. We’ll continue this discussion and quantify the amount of premium hedgers pay a little later, when we review the various indexes available to you to evaluate your CTA’s trading performance.

It’s important to note that speculators do not create the price risk. This risk is there. It is real, whether there is a futures market in a particular commodity or not. As a matter of fact, price risk is substantially greater when there isn’t a formal market. Open auctions with competitive bidding fixes prices. All the information—fact or fiction—affecting the perceived value of a commodity is resolved as buyers and sellers bid. This is true for the stock and bond markets as well as the futures markets. Read more »

Posted: March 10th, 2008 under Futures Contracts, Futures Market.
Comments: 3

“My CTA is beating the world!” That naturally is our goal when we select and invest in a professional futures trader, be he our spouse’s favorite nephew or someone of the stature of George Soros.

In the securities market, measuring success appears to be reasonably easy. Most advisors evaluate their performance against the Dow Jones averages. Since beating the Dow has been the yardstick for trading success in the stock market just about from its first publication in 1884, let’s examine it briefly and then see if there are comparable indexes available for the futures markets. But first, we need to understand the composition of the Dow so we can evaluate futures indexes.

How the Dow Is Calculated

Originally, the Dow was computed as a simple average—total up the prices of the stocks included in the index and divide by the number of stocks. Naturally, this system gave more weight to the higher- priced stock. Therefore, a major advance in a low-priced stock is diluted by a modest loss in a high-priced issue. Read more »

Posted: March 10th, 2008 under Future Exchange, Future Trading, Futures Contracts, Futures Index, Futures Market, Futures Trader.
Comments: 5