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Index Calculus
Income indices are set to 0 at the beginning of each calendar year.
Benchmark Income Indices
The benchmark coupon income index is calculated as follows:
ICt  ICt s  GI t s 
CVi ,Coupons
t
MVt s
The benchmark redemption income index is calculated as follows:
IRt  IRt s  GIt s 
s
CVi ,Redemption
t
MVt s
The benchmark income index is calculated as follows:
IN t  IN t s  GIt s 
s
CVi ,Coupons
 CVi ,Redemption
t
t
MVt s
Or simplified:
IN t  ICt  IRt
Liquid Income Indices
The liquid coupon income index is calculated as follows:
CVt Coupons  XRt  CASH t  CASH t s  CVt 
ICt  ICt s  GI t s 
MVt s  CASH t s
The liquid redemption income index is calculated as follows:
CVt Redemptions
IRt  IRt s  GI t s 
MVt s  CASH t s
The liquid income index is calculated as follows:
IN t  IN t s  GI t s 
CVt  XRt  CASH t  CASH t s  CVt 
MVt s  CASH t s
2.3. Rebalancing cost factor for liquid indices
At the end of each month, after the rebalancing, the index level of most liquid indices is adjusted to account for the
cost occurred in rebalancing the index. For most of the index adjustments between two rebalancing dates, the
adjustment cost should be zero and no adjustment will be necessary. There are two approaches to capture the cost.
The cost is either fixed (e.g. 2bps) or takes into account the actual transaction costs:
∑
∑
∑
∑
Hence, at each rebalancing the index level is adjusted as follows:
(
)
(
)
(
)
For a detailed explanation of the formula, please refer to the Appendix.
2.4. Hedged and Unhedged Index Calculation
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