Rogers International Commodities Index (RICI)

Rogers International Commodities Index (RICI)

The Rogers International Commodity Index (RICI) is a composite, U.S. dollar-based, total return commodity index, created by the investment legend Jim Rogers in 1998. RICI represents the value of a basket of 36 diferent exchange-traded physical commodities consumed in the world economy, spanning from agriculture to energy to metal products, combined with the returns of the 3 month U.S. Treasury bill rate held as collateral.

The selection and weighting of the portfolio is reviewed annually in December by the RICI Committee, which consists of the chairman Jim Rogers and one representative of each party: UBS, Daiwa Securities, Beeland Management, Diapason Commodities Management, and ABN Amro.

Only the chairman can recommend new members for the committee. The selection criteria for futures contracts to be included in the RICI are an important role in global (developed and developing economies) consumption and public tradeability on an exchange to guarantee tracking and verification.


In terms of ensuring liquidity, the most liquid futures contract internationally, in terms of volume and open interest, is chosen for computation of the RICI, if a commodity trades on several exchanges.

To maintain stability and investability, the composition of the RICI is only altered under uncompromising circumstances, such as, nonstop unfavorable trading conditions for a single futures contract or critical changes in international consumption patterns.

The Chicago Mercantile Exchange in collaboration with Merrill Lynch offer TRAKRS (total return asset contracts), which are exchange-traded, nontraditional futures contracts on the RICI.

Roll-Up

Roll-Up

A roll-up is a consolidation strategy that aims to assemble a leading firm within a certain industry through an amalgamation of acquisitions and natural growth. A roll-up can be in combination with either an initial public offering of stock (sometimes called a "poof IPO") or a high-yield debt offering.

A more common strategy would be the strategic roll-up ("build-up" or "buy and build" strategy), which uses private equity and debt for the initial acquisitions. The strategic roll-up identii es a fragmented industry characterized by relatively small firms.

Buyout firms (e.g., private equity companies), which have industry expertise, purchase a firm as a platform for further acquisitions (add-ons) in the same industry. The goal is to build firms with strong management, develop revenue growth while reducing costs, with the objectives of improved margins, increased cash flows, and increased valuations.


It is vital that the consolidation strategy takes place in industries where acquisitions could be strategically well integrated and where the synergies of consolidation comprise both revenue enhancements and cost savings.

In addition, characteristics of these industries are high fragmentation (i.e., numerous small competitors), a considerable industry revenue base (i.e., multibillion), maturity of industry (moderate-to-slow growth in overall industry revenues), no dominant market leader, and a small number, if any, of national players.

Thus critical mass is attainable with a manageable number of acquisitions and numerous willing sellers with profitable operations. These features generate the opportunity for a well-financed, professionally managed group to rapidly achieve a national presence and a leading role in an industry through acquisitions.

Round Turn

Starting to rain

The purchase (or sale) of a futures contract commits the buyer (seller) to accept (provide for) the delivery of a commodity or financial instrument in a specified amount of the commodity or financial instrument at a specified time, location, amount, and quality.

If the buyer or seller of the futures contract does not want to take on the obligation of accepting or providing delivery of the underlying commodity or financial instrument, it is necessary to enter into an of setting purchase or sale of the same futures contract.

For example, if one purchased a contract for 1000 barrels of June 2008 crude oil, then one would need to sell a contract for 1000 barrels of June 2008 crude oil prior to the last trading day for this futures contract, as specified by the relevant futures exchange in order to not have to accept or receive delivery of 1000 barrels of crude oil. This purchase and corresponding sale of a futures contract is termed "round turn".

Sample Grade

Squirrels

A sample grade is the quality of a commodity that is too low to be acceptable for delivery in satisfaction of futures contracts. The grade that is acceptable for delivery is called standard grade. First grade or high grade is the opposite of the sample grade. The different grades are defined due to the variations in the quality of commodities. Grain is especially affected by a broad range of these variations.

To guarantee a specific quality, the United States Grain Standards Act defines inter alia the sampling, licensing of inspectors, and inspection requirements for commodities. The Secretary of Agriculture of the United States is authorized to issue regulations under the Act to ensure the efficient execution of the provisions.

Included in the regulations are the Official Grain Standards of the United States. These standards have been developed for wheat, corn, barley, oats, rye, flaxseed, soybeans, etc. They include descriptions for different quality grades including sample grades.


For instance, for corn, U.S. sample grade is corn that does not meet any requirements of the other quality grades, that includes a determined amount of contaminants such as glass, stones, or unknown foreign substances, that has a commercially objectionable foreign odor, or that is otherwise of distinctly low quality. If a commodity is U.S. sample grade, it is not allowed to be delivered.

The grading of a certain commodity is accomplished by licensed inspectors. They are obliged to satisfy criteria set by the Secretary of Agriculture regarding requirements for taking a correct and representative sample and for determining the accurate grade of any commodity.

Scalper

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In futures exchanges, a scalper is considered as a noninstitutional trader who makes a great number of purchases and sales each day. The scalper maintains the resulting positions for only brief intervals of time, and holds either zero or small net overnight positions.

He/she purchases and sells quickly, making either little profit or loss. In general, the scalper is ready to purchase at a lower price than the last transacted price and to sell at a fraction higher, therefore generating market liquidity.

Silber (1984) found that the average scalper holds positions open for approximately 2 min and trades an average of 2.9 contracts per trade. Working (1977) found that a typical scalper holds positions open from 1 to 9 min and trades only one to four contracts at a time.


Scalpers tend to specialize in market making. Collectively, they estimate the function of institutional market makers by making available the required liquidity services. They are seen as providers who match buyers and sellers requiring instantaneous execution of their trades.

In fact, scalpers receive income from hedgers by momentarily taking up hedging orders that are not immediately assimilated. The price of immediacy is, thus, the mechanism by which scalpers derive their profit. Nevertheless, scalpers are under no obligation to continually bid or offer, or to make an orderly market.

Scalpers tend to specialize in scalping particular commodities rather than moving around the floor, and they do little brokering. In fact, they do little speculating outside their home market and infrequently execute trades for other participants in the market.

To summarize, scalpers tend to trade for their own account in their home market in such a fashion as to generate income from the asynchronous order flow from customer accounts.

Seasoned Equity Offering (SEO)

✯ Snow Path

A seasoned equity offering (SEO) is a new issue of an equity security that has previously been placed in the market through a prior issuance. Although an SEO is a primary market transaction, it is not the first time that the security will actually be held by the general investing public; it simply adds to the number of outstanding shares.

Firms, generally, have two options for facilitating an SEO: a cash offer or a rights offer. In a cash offering, the new shares are issued to the public for cash, which results in a reduction of the proportional ownership of existing shareholders (i.e., dilution).

However, with a rights offering, existing shareholders are awarded rights to purchase the new shares, many times at a reduced cost relative to the market value. Existing shareholders can choose to exercise the rights, thereby retaining their proportional ownership, or they can sell the rights in the open market.


Under either approach, issuing firms will typically employ an underwriter, who will serve a similar role as in an initial public offering (IPO)—overseeing legal, administrative, and marketing aspects of the issuance.

Nonetheless, since the security is already traded, there is less pricing risk, which implies the compensation (gross spread) received by the underwriter is much smaller than for an IPO. Further, this reduced pricing risk also results in a much lower degree of underpricing (almost nonexistent) relative to a typical IPO.

Second-Stage Funding

Cliff jump

Second stage-funding is a special type of financing round in venture capital finance and fits into the general concept of capital staging, that is, the portioning of capital contributions according to the achievement of milestones in the development of the financed firm.

It belongs to the broader category of the so-called expansion phase financings, which include second-, third-, and later-stage financings such as mezzanine and bridge financings. In contrast to early-stage financings such as seed, start-up, and first-stage financings, expansion phase financings relate typically to entrepreneurial firms that need additional capital in order to enlarge the product port folio through additional R&D, to increase production capacities, to penetrate new markets, etc.

Hence, the distinctive characteristic of second-stage financings is that firms already have at least one developed, that is a marketable product. Besides industry-specific aspects venture capital firms often specialize in financing entrepreneurial firms, that are in a distinctive financing stage.


That is, because financing and advising firms in those different development stadiums also need particular competencies on the side of the venture capitalist. Important aspects to be mentioned with respect to second-stage funding are the reduction of adverse selection and moral hazard problems, the professionalization of strategic management, the improvement of (financial) monitoring, networking, and managerial recruitment, as well as forcing CEO turnover if necessary.