What does an excess return index provide?

• A. Returns below market average
• B. Returns over cash, linked to commodity futures prices
• C. Returns that are exclusively interest-based
• D. Returns with minimal risk exposure

Answer: (B)

An excess return index measures the returns generated from an investment after accounting for a benchmark, often related to risk-free rates or other relevant indices. In the context of commodity futures prices, an excess return index provides a measure of the returns above the cash yield of the underlying commodity. This means that it captures not only price changes in the commodity futures but also any income generated from holding the commodities, which is particularly relevant when the return is linked to the performance of futures contracts.

In the case of this index, it reflects the risk premium associated with investing in commodities, as it includes returns that are derived from both capital appreciation and the roll yield of futures positions. This makes it relevant for investors looking to assess performance in the commodity markets compared to simply holding cash or other safer investments.

The other options do not accurately capture the essence of the excess return index related to commodity futures. While some may imply certain types of returns, they do not encompass the broader concept of an excess return index whose focus is on capturing the performance relative to cash and risk factors in the commodities market.