Definition Of Forex

The foreign exchange (currency, forex or FX) market is where currency trading takes place. FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global forex and related markets is continuously growing. Traditional turnover was reported to be over US$ 3.2 trillion in April 2007 by the Bank for International Settlement. Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.This article will try to let you know more about forex.............

Futures

Today’s futures marketplace is complex. Trades can take many forms – from fixed income to equities, commodities to currencies. To make sense of it all, you need a firm with in-depth knowledge of the markets, both locally and globally. Goldman Sachs has been a pioneer in the futures marketplace for over 30 years. We dive into the details – from research to execution to final settlement – so you can focus on making optimal investment decisions. Our client-focused model ensures complete anonymity and the highest levels of service at every touch point

Mortgage Rate Calculator

Goldman Sachs offers a CMM pricing calculator to help facilitate transactions in the nascent mortgage rate forwards market. We also provide an associated explanatory documentation. You can use the calculator to input your own assumptions for mortgage prices, durations, convexities and implied vols, and the calculator returns an implied forward mortgage rate for the specified forward date. The algorithm is primarily intended for evaluating short-dated CMM trades.

S&P GSCI Commodity Index

Approach

Economic Weighting
The S&P GSCI™ is world-production weighted; the quantity of each commodity in the index is determined by the average quantity of production in the last five years of available data. Such weighting provides the S&P GSCI™ with significant advantages, both as an economic indicator and as a measure of investment performance.

For use as an economic indicator, the appropriate weight to assign each commodity is in proportion to the amount of that commodity flowing through the economy (i.e. the actual production or consumption of that commodity). For instance, the impact that doubling the price of corn has on inflation and on economic growth depends directly on how much corn is used (or produced) in the economy.

From the standpoint of measuring investment performance, production-weighting is not only appropriate but vital. The key to measuring investment performance in a representative fashion is to weight each asset by the amount of capital dedicated to holding that asset. In equity markets, this representative measurement of investment performance is accomplished through weighting indices by market capitalization.

For commodities, there is no direct counterpart to market capitalization. The problem is that commodities, and the related price risks, are held in a variety of ways – long futures positions, over-the-counter investments, long term fixed-price purchasing contracts, physical inventory at the producer, etc. – making a complete accounting of capital dedicated to holding commodities from the time they are produced to the time they are consumed infeasible. A simple way to achieve a close analog to true market capitalization, abstracting from differences in inventory patterns, is to note that the net long position of the economy is proportional to the quantity produced; hence, production weighting.

A Broad Spectrum of Commodities
The S&P GSCI™ contains as many commodities as possible, with the rules excluding commodities only to retain liquidity and investability in the underlying futures markets. Currently, the S&P GSCI™ contains 24 commodities from all commodity sectors: six energy products, five industrial metals, eight agricultural products, three livestock products and two precious metals.¹ This broad range of constituent commodities provides the S&P GSCI™ with a high level of diversification, both across sub-sectors and within each sub-sector. This diversity minimizes the effects of highly idiosyncratic events, which have large implications for the individual commodity markets but are muted when aggregated to the level of the S&P GSCI™.

Together, the diversity of its constituent commodities and their economic weighting allow the S&P GSCI™ to respond in a stable way to world economic growth, even as the composition of global growth changes through time. When world growth is dominated by industrialized economies, the metals sector of the S&P GSCI™ generally responds more than the agricultural components. Similarly, when emerging markets dominate world growth, agricultural and petroleum-based commodities generally respond the most. Thus, for example, an index that significantly underweights agriculture would significantly underperform in a global economy with weak OECD and strong emerging markets growth, much as a stock index that only contained industrials would provide a misleading picture of a service-led economy.

As the GSCI transitioned from including Unleaded Gasoline to including RBOB Gasoline, the GSCI contained 25 commodities, 7 of which were in the energy sector. This transition period lasted from the August 2006 roll to the October 2006 roll.

Liquidity Constraints for Inclusion and Return Calculations
Individual commodities are screened by liquidity for inclusion in the S&P GSCI™. The eligibility requirements are designed to promote cost-effective implementation and true investability. Underlying liquidity eases hedging of derivative products and investing in sub-sector or individual commodity overlays. Furthermore, liquidity in the underlying futures markets facilitates the discovery of true market prices for the components of the S&P GSCI™. S&P GSCI™ returns are calculated (discussed in detail in the following section) based on the arithmetic average of stable long positions in futures contracts. This methodology, along with the liquidity in the underlying markets, allows easy implementation of the portfolio of futures contracts that the S&P GSCI™ represents. These characteristics of the GSCI are designed to allow for efficient and relatively inexpensive arbitrage of publicly traded S&P GSCI™ related instruments such as the CME futures contract.

Components, Weights, Index Levels and Construction

S&P GSCI™ Components and Weights

Currently, 24 commodities meet the eligibility requirement for the S&P GSCI™. A list of these components and their dollar weights in the S&P GSCI™ organized by subsector, is presented in Table 1. Table 1: S&P GSCI™ Components and Dollar Weights (%) (December 5, 2008) Energy 67.02 Crude Oil 32.45 Brent Crude Oil 12.14 RBOB Gas 3.19 Heating Oil 5.26 GasOil 5.17 Natural Gas 8.81 Industrial Metals 6.69 Aluminium 2.73 Copper 2.50 Lead 0.35 Nickel 0.57 Zinc 0.55 Precious Metals 3.56 Gold 3.26 Silver 0.30 Agriculture 16.53 Wheat 4.45 Red Wheat 1.08 Corn 4.11 Soybeans 2.80 Cotton 0.99 Sugar 1.80 Coffee 0.91 Cocoa 0.40 Livestock 6.20 Live Cattle 3.49 Feeder Cattle 0.63 Lean Hogs 2.07 Table 2 contains the index values for the S&P GSCI™ and its main sub-indices. All sub-indices of the S&P GSCI™ follow the same rules regarding world production weights, methodology for rolling and other functional characteristics as disclosed in the S&P GSCI™ manual. S&P GSCI™ Index Values Table 2: S&P GSCI™ Index Values (December 5, 2008) Spot Excess Return Total Return S&P GSCI™ 317.9964 363.4456 3731.226 Energy 152.9052 240.0304 887.3656 Non- Energy 239.5189 167.1581 1716.17 Industrial Metals 194.3916 131.5747 891.7427 Precious Metals 987.7637 109.6054 966.9378 Agriculture 246.8487 46.29209 475.3717 Livestock 203.905 226.8045 2328.617 Agriculture & Livestock 217.2382 87.33241 896.7976 The S&P GSCI Reduced Energy, Light Energy and UltraLight Energy sub-indices track the performance of a rolling basket of front-month commodity futures using the same conventions as the S&P GSCI™. The S&P GSCI Reduced, Light and UltraLight Energy Indices contain all 24 commodities and differ from the benchmark S&P GSCI™ index only with regards to their lesser energy weighting. The S&P GSCI Reduced Energy Index calculation uses 1/2 of the S&P GSCI™ contract production weights for the energy components, while the S&P GSCI Light and S&P GSCI UltraLight Energy Index calculations use 1/4 and 1/8 of the S&P GSCI™ contract production weights for the energy components, respectively. Table 3 contains the index values for these two indices. S&P GSCI Reduced and S&P GSCI Light Energy Index Values Table 3: S&P GSCI Reduced and S&P GSCI Light Energy Index Values (December 5, 2008) Spot Excess Return Total Return S&P GSCI Reduced Energy 297.9365 292.0944 2998.646 S&P GSCI Light Energy 277.1529 238.7915 2451.523 S&P GSCI Ultra-Light Energy 260.5213 205.5776 2110.571 S&P GSCI Non- Energy 239.5189 167.1581 1716.17 S&P GSCI Agriculture & Livestock 217.2382 87.33241 896.7976

Tables 4, 5, 6, 7 and 8 contain the dollar weights for the S&P GSCI Reduced Energy, S&P GSCI Light Energy, S&P GSCI Ultra-Light Energy, S&P GSCI Non-Energy, and S&P GSCI Agriculture & Livestock Indices respectively.

Table 4: S&P GSCI Reduced Energy Components and Dollar Weights (%) (December 5, 2008)

Energy 50.40 Crude Oil 24.40 Brent Crude Oil 9.13 RBOB Gas 2.40 Heating Oil 3.96 GasOil 3.88 Natural Gas 6.62

Industrial Metals 10.07 Aluminium 4.11 Copper 3.76 Lead 0.52 Nickel 0.86 Zinc 0.82

Precious Metals 5.35 Gold 4.90 Silver 0.46

Agriculture 24.86 Wheat 6.69 Red Wheat 1.62 Corn 6.19 Soybeans 4.21 Cotton 1.48 Sugar 2.71 Coffee 1.36 Cocoa 0.59

Livestock 9.32 Live Cattle 5.25 Feeder Cattle 0.95 Lean Hogs 3.12

Table 5: S&P GSCI Light Energy Components and Dollar Weights (%) (December 5, 2008)

Energy 33.69 Crude Oil 16.31 Brent Crude Oil 6.10 RBOB Gas 1.60 Heating Oil 2.64 GasOil 2.60 Natural Gas 4.43

Industrial Metals 13.46 Aluminium 5.49 Copper 5.02 Lead 0.69 Nickel 1.15 Zinc 1.10

Precious Metals 7.16 Gold 6.55 Silver 0.61

Agriculture 33.24 Wheat 8.94 Red Wheat 2.17 Corn 8.27 Soybeans 5.63 Cotton 1.98 Sugar 3.63 Coffee 1.82 Cocoa 0.79

Livestock 12.46 Live Cattle 7.02 Feeder Cattle 1.27 Lean Hogs 4.17

Table 6: S&P GSCI Ultra-Light Energy Components and Dollar Weights (%) (December 5, 2008)

Energy 20.26 Crude Oil 9.81 Brent Crude Oil 3.67 RBOB Gas 0.96 Heating Oil 1.59 GasOil 1.56 Natural Gas 2.66

Industrial Metals 16.18 Aluminium 6.60 Copper 6.04 Lead 0.84 Nickel 1.39 Zinc 1.32

Precious Metals 8.61 Gold 7.87 Silver 0.73

Agriculture 39.97 Wheat 10.75 Red Wheat 2.61 Corn 9.94 Soybeans 6.77 Cotton 2.39 Sugar 4.36 Coffee 2.19 Cocoa 0.96

Livestock 14.98 Live Cattle 8.44 Feeder Cattle 1.53 Lean Hogs 5.01

Table 7: S&P GSCI Non- Energy Components and Dollar Weights (%) (December 5, 2008)

Energy 0.00 Crude Oil 0.00 Brent Crude Oil 0.00 RBOB Gas 0.00 Heating Oil 0.00 GasOil 0.00 Natural Gas 0.00

Industrial Metals 20.29 Aluminium 8.28 Copper 7.57 Lead 1.05 Nickel 1.74 Zinc 1.65

Precious Metals 10.79 Gold 9.87 Silver 0.92

Agriculture 50.12 Wheat 13.48 Red Wheat 3.27 Corn 12.47 Soybeans 8.49 Cotton 2.99 Sugar 5.47 Coffee 2.75 Cocoa 1.20

Livestock 18.79 Live Cattle 10.58 Feeder Cattle 1.92 Lean Hogs 6.28

Table 8: S&P GSCI Agriculture & Livestock Components and Dollar Weights (%) (December 5, 2008)

Energy 0.00 Crude Oil 0.00 Brent Crude Oil 0.00 RBOB Gas 0.00 Heating Oil 0.00 GasOil 0.00 Natural Gas 0.00

Industrial Metals 0.00 Aluminium 0.00 Copper 0.00 Lead 0.00 Nickel 0.00 Zinc 0.00

Precious Metals 0.00 Gold 0.00 Silver 0.00

Agriculture 72.74 Wheat 19.56 Red Wheat 4.75 Corn 18.10 Soybeans 12.33 Cotton 4.34 Sugar 7.93 Coffee 3.99 Cocoa 1.74

Livestock 27.26 Live Cattle 15.36 Feeder Cattle 2.79 Lean Hogs 9.12

Table 9: S&P GSCI Agriculture Components and Dollar Weights (%) (December 5, 2008)

Agriculture 100.00 Wheat 26.90 Red Wheat 6.53 Corn 24.88 Soybeans 16.95 Cotton 5.97 Sugar 10.91 Coffee 5.48 Cocoa 2.39

S&P GSCI JPY Index Values

Table 10: S&P GSCI JPY Index Values (December 5, 2008)

Spot Excess Return Total Return

S&P GSCI JPY 57.00291 48.52422 51.51084

S&P GSCI Agriculture JPY Index Values

Table 11: S&P GSCI Agriculture JPY Index Values (December 5, 2008)

Spot Excess Return Total Return

S&P GSCI Agriculture JPY 70.38157 53.35991 56.6435

S&P GSCI Crude Index Values

Table 12: S&P GSCI Crude Index Values (December 5, 2008)

Spot Excess Return Total Return

S&P GSCI Crude 225.9891 501.5224 1340.49

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Construction of the S&P GSCI™

Three S&P GSCI™ indices are published: excess return, total return and spot. The excess return index measures the returns accrued from investing in uncollateralized nearby commodity futures, the total return index measures the returns accrued from investing in fully-collateralized nearby commodity futures, and the spot index measures the level of nearby commodity prices. Thus, the excess return and total return indices provide useful representations of returns available to investors from investing in the S&P GSCI™. In fact, the total return (i.e., the return on the S&P GSCI™ total return index) is the measure of commodity returns that is completely comparable to returns from a regular investment in the S&P 500 (with dividend reinvestment) or a government bond, while the return on the excess return index is comparable to the return on the S&P 500 above cash.

S&P GSCI™-TR Returns as of December 5, 2008

Table 13: S&P GSCI™ TR Returns (December 5, 2008)

Daily -5.37% MTD -19.0% YTD -50.0%

S&P GSCI™ Enhanced Strategies

Table 14: S&P GSCI™ Enhanced Strategies (December 5, 2008)

Spot Excess Return Total Return

S&P GSCI™ E10 195.8123 245.064 415.9661

S&P GSCI™Enhanced Commodity Index 480.1202

S&P GSCI™ UltraLight Energy Strategy 27 131.2306 115.7882 196.5489

Total Return, Excess Returns and Spot Indices
The S&P GSCI™ Total Return index measures a fully collateralized commodity futures investment that is rolled forward from the fifth to the ninth business day of each month. Currently the S&P GSCI™ includes 24² commodity nearby futures contracts. The S&P GSCI™ Total Return is significantly different than the return from buying physical commodities.

The S&P GSCI™ Spot index tracks the price of the nearby futures contracts, not returns available to investors. At the end of every business day, the S&P GSCI™ is composed of the same proportions by weight of the underlying commodities and expirations as the portfolio represented by the S&P GSCI™ Excess Returns.

Most important, the S&P GSCI™ Spot index cannot be compared directly with the S&P GSCI™ Total Return index, either conceptually or with a single mathematical operation.

On the first point, you CANNOT add T-bills to the spot return in order to draw a comparison with the S&P GSCI™ Total Return. In fact there is nothing you can do to make a direct comparison between the Spot and Total Return indices because they are measuring two very different kinds of investments.

Meanwhile, the S&P GSCI™ Excess Return measures the return from investing in nearby S&P GSCI™ futures and rolling them forward each month (on the fifth to ninth business days of each month), always keeping your investment in nearby futures. This is a leveraged futures investment. The S&P GSCI™ Excess Return (unlike the S&P Excess Return ) is NOT the return above cash. The S&P GSCI™ Excess Return cannot be compared directly to the S&P GSCI™ Total Return, either. The S&P GSCI™ Excess Return plus T-bills does not equal the S&P GSCI™ Total Return because it ignores the impact of the re-investment of T-bill collateral yield gains back into commodity futures, and gains (losses) from commodity futures back into (out of) T-bills.

As the GSCI transitioned from including Unleaded Gasoline to including RBOB Gasoline, the GSCI contained 25 commodities, 7 of which were in the energy sector. This transition period lasted from the August 2006 roll through the October 2006 roll.

Passive Portfolios

By design, the S&P GSCI™ reflects a passive portfolio of long positions in futures. However, unlike a passive equity portfolio, a passive futures portfolio requires regular transactions, for the simple reason that futures expire. Thus, the futures portfolio represented by the S&P GSCI™ is, in this way, comparable to a bond portfolio of a specific duration.

In the S&P GSCI's™ case, the maturity of choice is the nearby futures contract (i.e. the contract nearest to expiration). Futures contracts near to expiration are rolled forward (i.e. exchanged for futures contracts with the next applicable expiration date) at the beginning of their expiration months.

Many commodities, such as those in the energy and industrial metals sectors, have liquid futures contracts that expire every month. Therefore, these commodities are rolled forward every month. Other commodities, most notably agricultural and livestock products, have only a few contract months each year that trade with sufficient liquidity. Thus, these commodities, with futures that expire less frequently, roll forward less frequently than every month. Table 13 contains a listing of the expiration months included in the S&P GSCI™ in 2007.

Table 13: Contract Months in the S&P GSCI™ in 2007

Crude Oil	All	Cocoa	Mar, May, Jul, Sep, Dec
Brent Crude Oil	All	Cotton	Mar, May, Jul, Dec
Heating Oil	All	Aluminum	All
GasOil	All	Copper	All
RBOB Gasoline	All	Nickel	All
Natural Gas	All	Zinc	All
Wheat	Mar, May, Jul, Sep, Dec	Lead	All
Kansas Wheat	Mar, May, Jul, Sep, Dec	Lean Hogs	Feb, Apr, Jun, Jul, Aug, Oct, Dec
Corn	Mar, May, Jul, Sep, Dec	Live Cattle	Feb, Apr, Jun, Aug, Oct, Dec
Soybeans	Jan, Mar, May, Jul, Nov	Feeder Cattle	Jan, Mar, Apr, May, Aug, Sep, Oct, Nov
Coffee	Mar, May, Jul, Sep, Dec	Gold	Feb, Apr, Jun, Aug, Dec
Sugar	Mar, May, Jul, Oct	Silver	Mar, May, Jul, Sep, Dec

Roll Period

The rolling forward of the underlying futures contracts in the excess return index portfolio occurs once each month, on the fifth through ninth business days (the roll period). As explained above, some of the underlying commodity contracts expire in the next month and thus need to be rolled forward. The simplest way to think of the process is as rolling from one basket of nearby futures (the first nearby basket) to a basket of futures contracts that are further from expiration (the second nearby basket). The S&P GSCI™ is calculated as though these rolls occur at the end of each day during the roll period at the daily settlement prices.

The portfolio is shifted from the first to the second nearby baskets at a rate of 20% per day for the five days of the roll period. Until just before the end of the fifth business day, the entire S&P GSCI™ portfolio consists of the first nearby basket of commodity futures. At the end of the fifth business day, the portfolio is adjusted so that 20% of the contracts held are in the second nearby basket (i.e. a basket of future contracts that are farther from maturity), with 80% remaining the first nearby basket.

The roll process continues on the sixth, seventh and eighth business days, with relative weights of first to second nearby baskets of 60%/40%, 40%/60% and 20%/80%. At the end of the ninth business day, the last of the old first nearby basket is exchanged, completing the roll and leaving the entire portfolio in what we have been calling the second nearby basket. At this time, this former second nearby basket becomes the new first nearby basket, and a new second nearby basket is formed (with futures maturities further in the future) for use in the next month's roll.

The last key point to be made about the roll process is to specify exactly what the 80%/20% or other relative splits between nearby baskets mean. The roll percentages refer to contracts or quantities, not value. Taking the first day of the roll as an example, just before the roll takes place at the end of the day, the S&P GSCI™ consists of the first nearby basket. That portfolio, constructed the night before and held throughout the fifth business day, has a dollar value. For the roll, that dollar value is distributed across the first and second nearby baskets such that the number of contracts or the quantity of the first nearby basket is 80% of the total and the quantity held of the second nearby basket is 20% of the total.

The dollar value held of each nearby basket can then be calculated from those quantity weights by multiplying them by the prices of the futures contracts contained in each basket. As the baskets contain futures with different maturities for some of the commodities, the prices are generally close but not exactly the same. Hence, the percentage of the portfolio value (i.e. dollar weight) held in each basket is generally close to, but not exactly equal to, the 80%/20% split specified for the quantities.

The world-production weighting of the S&P GSCI™ is accomplished by keeping the quantity weights of the individual commodities within each basket proportional to world production weights, which are averages of historical production levels and are generally updated every year.

Investing

The S&P GSCI™ has a futures contract listed on the CME, making it a truly public index that has been traded by numerous market makers for over 12 years. An investment in the S&P GSCI™ accesses the liquidity of the underlying commodity markets and offers excellent price transparency.

There are numerous ways to invest in the S&P GSCI™ Commodity Index. OTC swaps on either the Excess or Total Return indices allow investors to have direct participation in the S&P GSCI™ Excess or Total Return indicies but also have an unlimited downside. Structured notes can be used to gain exposure while limiting the downside from investing. S&P GSCI™ futures listed on the Chicago Mercantile Exchange can be rolled monthly to replicate the S&P GSCI™ index. Third-party asset managers offer products providing commodity exposure that are benchmarked to the S&P GSCI™. Certificates and warrants on the S&P GSCI™ are available, but US residents are unable to invest via this method.

Disclosures

Standard & Poor's ® and S&P ® are registered trademarks of The McGraw-Hill Companies, Inc. and S&P GSCI™ is a trademark of The McGraw-Hill Companies, Inc. and have been licensed for use by Goldman, Sachs & Co. This material is for the private information of the user, and neither Goldman Sachs nor S&P is soliciting any action based upon it. Neither Goldman Sachs nor S&P shall have any liability, contingent or otherwise, to the user or to third parties, for the quality, accuracy, timeliness, continued availability or completeness of the data nor for any special, indirect, incidental or consequential damages which may be incurred or experienced because of the use of the data made available herein, even if Goldman Sachs or S&P has been advised of the possibility of such damages. The information provided herein is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. The material is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. We and our affiliates, officers, directors, managing directors, and employees, including persons involved in the preparation or issuance of this material may, from time to time, have long or short positions in, and buy or sell, the securities, or derivatives (including options) thereof, of commodities or indices mentioned herein.

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