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23-480: The Christmas Price Index was conceived by the Chief Economist of Provident National Bank as a humorous commodity price index to measure the changing cost of goods over time. Commodity price indices, as compiled by economics, use a " market basket " of certain goods and then measure the cost of the goods from year to year to gauge inflation in different sectors of the economy. The Christmas Price Index chose

46-410: A total return swap ( TRS ), total rate of return swap ( TRORS ), or cash-settled equity swap is a financial contract that transfers both the credit risk and market risk of an underlying asset . A swap agreement in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both

69-414: A "Christmas Price Index" and "The True Cost of Christmas". The "Christmas Price Index" is calculated by adding the cost of the items in the song. The "True Cost of Christmas", however, is calculated by buying a partridge in a pear tree on each of the twelve days, buying two turtle doves from the second day onward, for a total of 22 turtle doves, etc., for the complete set of 364 items. The price of each item

92-427: A basket of commodities to measure their performance. They are similar to stock market indices but track the price of a basket of specific commodities. These indexes are often traded on exchanges, allowing investors to gain easier access to commodities without having to enter the futures market. The value of these indexes fluctuates based on their underlying commodities, and this value can be traded on an exchange in much

115-418: A milk cow, goat, or other such animals, which is an additional cost. Second, the index also relies on only one data source per gift when a more reliable approach might use several retailers. Third, the index prices products that do not actually correspond with the actual gift described. The ten "lords a-leaping" are valued by using the cost of hiring male ballet dancers instead of real lords, as lordships are

138-467: A title of nobility not recognized in the United States . Commodity price index A commodity price index is a fixed-weight index or (weighted) average of selected commodity prices, which may be based on 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. It is an index that tracks

161-680: Is now known as the Bloomberg Commodity Index. Other commodity indices include the Reuters / CRB index (which is the old CRB Index re-structured in 2005) and the Rogers Index. In 2005 Gary Gorton (then of Wharton) and Geert Rounwehorst (of Yale) published "Facts and Fantasies About Commodities Futures", which pointed out relationships between a commodities index and the stock market, and inflation. They were both employed as consultants to AIG Financial Products (AIG-FP), which

184-739: Is set as follows: Like other lighthearted economic indicators, such as The Economist 's Big Mac Index which tracks the price of the Big Mac hamburger in different countries, the Christmas Price Index nevertheless produces results which have meaningful interpretations. In general, the prices in the index have reflected the growing service economy in the United States—prices for goods have mostly fallen, but prices for labor have risen greatly. The cost of hiring ladies and lords, for example, has risen over 300 percent. After

207-618: The Williams Act . As discussed in CSX Corp. v. The Children's Investment Fund Management , TCI argued that it was not the beneficial owner of the shares referenced by its total return swaps and therefore the swaps did not require TCI to publicly disclose that it had acquired a stake of more than 5% in CSX. The United States District Court rejected this argument and enjoined TCI from further violations of Section 13(d) Securities Exchange Act and

230-527: The SEC-Rule promulgated thereunder. Total return swaps are also very common in many structured finance transactions such as collateralized debt obligations ( CDOs ). CDO Issuers often enter TRS agreements as protection seller in order to leverage the returns for the structure's debt investors. By selling protection, the CDO gains exposure to the underlying asset(s) without having to put up capital to purchase

253-400: The benefit of a large exposure with a minimal cash outlay. In a total return swap, an investment bank could buy assets for a hedge fund , which is paid returns from the assets. The hedge fund can thereby remain anonymous insofar as the investment bank is the owner. If the value of the assets drop considerably, and the hedge fund is unable to provide more collateral on a margin call from

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276-452: The buyer were to purchase each item from the least expensive vendor, the total index would be $ 19,844.95, a discount of 5.86%. The Christmas Price Index has been criticized for a number of reasons. First, the index does not clearly define the products that comprise each of the twelve gifts. For example, the price for the eight "maids a-milking" only includes the cost of eight laborers at federal minimum wage, while milking also requires at least

299-526: The high cost of the dancers, the seven swans are the most expensive item on the index; the unpredictable breeding cycle of swans makes their supply uncertain. Much as the United States Consumer Price Index excludes volatile energy and food prices from its "core" index, the core Christmas Price Index excludes the swans; for 2008, the total price index rose 8.1% from 2007, while the core index rose only 1.1%. The cheapest item in

322-440: The income it generates and any capital gains. In total return swaps, the underlying asset, referred to as the reference asset, is usually an equity index, loans, or bonds. This is owned by the party receiving the set rate payment. Total return swaps allow the party receiving the total return to gain exposure and benefit from a reference asset without actually having to own it. These swaps are popular with hedge funds because they get

345-459: The index is the partridge, which, in 2008, could be purchased for $ 20. Costs have generally risen and fallen along with the standard Consumer Price Index. The survey also tracks the cost of ordering the items online; doing so is significantly more expensive, in part due to shipping costs. In 2008, PNC estimated the total cost at $ 31,956.62, up 2.3% from 2007, while purchasing all 364 items online would cost $ 131,150.76, an increase of 1.8%. However, if

368-522: The investment bank, the investment bank can sell the assets. High-cost borrowers who seek financing and leverage, such as hedge funds, are natural receivers in Total Return Swaps. Lower cost borrowers, with large balance sheets, are natural payers. Less common, but related, are the partial return swap and the partial return reverse swap agreements, which usually involve 50% of the return, or some other specified amount. Reverse swaps involve

391-439: The items in the popular Christmas carol " The Twelve Days of Christmas " as its market basket: a partridge in a pear tree , two turtle doves , three French hens, four calling birds, five golden rings, six geese , seven swans , eight maids, nine dancing ladies, ten leaping lords, eleven pipers, and twelve drummers. According to tradition, the purchasing of the items begins on December 25 and ends on January 5. PNC compiles both

414-581: The product combines both market risk and credit risk , and so is not a pure credit derivative. Hedge funds use total return swaps to obtain leverage on the reference assets: they can receive the return of the asset, typically from a bank (which has a funding cost advantage), without having to put out the cash to buy the asset. They usually post a smaller amount of collateral upfront, thus obtaining leverage. Hedge funds (such as The Children's Investment Fund (TCI)) have attempted to use total return swaps to side-step public disclosure requirements enacted under

437-419: The sale of the asset with the seller then buying the returns, usually on equities. The TRORS allows one party (bank B) to derive the economic benefit of owning an asset without putting that asset on its balance sheet , and allows the other (bank A, which does retain that asset on its balance sheet) to buy protection against loss in its value. TRORS can be categorised as a type of credit derivative , although

460-529: The same way as stock index futures. Investors can choose to obtain a passive exposure to these commodity price indices through a total return swap or a commodity index fund . 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

483-554: The weights of certain constituents (e.g. precious and base metals) in the index. The first index to track commodity futures prices was the Dow Jones futures index which started being listed in 1933 (backfilled to 1924). The next such index was the CRB ("Commodity Research Bureau") Index , which began in 1958. Due to its construction both of these were not useful as an investment index. A later practically investable commodity futures index

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506-489: Was responsible for managing the DJAIG Index. Gorton's other role was to provide AIG-FP with the mathematical modelling expertise underpinning the construction of "Super-Senior" credit derivatives linked to mortgage-backed securities so as to ensure AIG was not exposed to risk of loss. The constituents in a commodity price index can be broadly grouped into the following categories: Total return swap In finance ,

529-720: Was the Goldman Sachs Commodity Index , created in 1991 and known as the "GSCI". The next was the Dow Jones AIG Commodity Index. It differed from the GSCI primarily in the weights allocated to each commodity. The DJ AIG had mechanisms to periodically limit the weight of any one commodity and to remove commodities whose weights became too small. After AIG's financial problems in 2008 the Index rights were sold to UBS and then to Bloomberg and it

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