An Insight into The Index Calculation

Index Development plays a very important roe when it comes to the economic growth and development of the economy. Index Maintenance therefore becomes integral for the smooth functioning. In this article we will highlight the basic know how about Index Calculation and Maintenance. Here is an Insight into the Index Calculation.

Price and Total Return Indexes calculations

The basis to calculate the Index is the Price Return as well as the Gross Total Return basis. To calculate the current Index level you need to divide the current modified Index market capitalization by Index divisor. To determine the divisor you need to know the initial capitalization base of Index as well as the base level. To update the divisor you need to have the know how of the corporate actions plus the composition changes.

Inclusion

The Gross Total Return calculation is inclusive of the regular cash dividends that are paid in the underlying constituents. These distributions are then reinvested into the Index when the dividend ex‐date opens. So as to get the total return version of this particular Index, the need arises to adjust the Index divisor on the morning of each of the Index constituent's ex‐date. This ensures taking into account the reinvestment of the dividend that is related.

Adjustments

It might so happen that the Index gets adjusted in so as to maintain the continuity of the Index level as well as the composition. These adjustments that take place are basically a reaction to the events that happen with the constituents so as to mitigate or else even eliminate the impact of the particular event on the performance of the Index. in case any of the stock is deleted from the Index due to the corporate action, for example the merger, the acquisition, the spin‐off, etcetera is ideally not replaced by any of the new stock, until the entire amount of the redistribution weight is removed on the given day from the Index.

All in all, this is an Insight into The Index Calculation. A basic knowledge is the must for the proper maintenance of the same.