Index Formula Contract For Free

Indexation is used in some countries to offset ?bracket creep,? which occurs in any progressive tax (q.v.) system when inflation pushes taxpayers into higher income tax brackets. Indexation may also refer to the linking of wage rates and financial instruments to a price index.

It is also referred to as floating or variable price contract. It means that the price paid for the commodity depends on the evolution of market prices, spot or forward. The index price may be the price on that day or the average price over a certain historical time window.

Social Security payments, for example, are indexed to the annual increase in the Consumer Price Index. In addition to indexation over time, prices and wages can be indexed over different geographic areas.

The indexation clause should specify whether price adjustments are to be made at fixed intervals, such as monthly, quarterly, semi-annually, or annually, or only at the expiration of the contract. Price adjustments have to be calculated over an interval whose beginning point is the contract's base period.

To calculate the Price Index, take the price of the Market Basket of the year of interest and divide by the price of the Market Basket of the base year, then multiply by 100.

The Indexation Clause is primarily designed to protect the position of the reinsurer against bearing an over-proportional amount of the inflation-driven increase in a claim that is subject to an XL recovery.

Essentially, the RMPI looks at the prices of several manufacturing expenses, including raw materials, transportation costs, taxes, and import duties. Then, it compares the price of these goods from the previous year to create a ratio or index.