CAIA - 24 - Assessing Commodity Investment Products Flashcards

1
Q

Prices of physical commodities (have/have not) kept up with inflation while returns on commodity futures (have/have not) kept up.

A

Prices of physical commodities have not kept up with inflation while returns on commodity futures have kept up.

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2
Q

Most direct commodity investments are achieved through ___.

A

Most direct commodity investments are achieved through derivatives.

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3
Q

The one exception where investors would like to own the physical commodity rather than a derivative is ___ ___.

A

The one exception where investors would like to own the physical commodity rather than a derivative is precious metals.

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4
Q

___ ___ ___ are the primary vehicle used by institutional investors for exposure to commodity indices.

A

Commodity index swaps are the primary vehicle used by institutional investors for exposure to commodity indices.

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5
Q

A commodity swaps initial market value is ___.

A

A commodity swaps initial market value is zero.

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6
Q

Investors may choose to use swaps instead of futures because:

  1. Futures aren’t ___
  2. ___-___swaps are available and liquid
  3. Investors maintain control of ___and can use it to earn a ___ ___
A

Investors may choose to use swaps instead of futures because:

  1. Futures aren’t available
  2. Long-term swaps are available and liquid
  3. Investors maintain control of cash and can use it to earn a higher return
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7
Q

Swaps are preferred by some institutional investors because they are ___ ___ and ___ ___ risk.

A

Swaps are preferred by some institutional investors because they are competitively priced and spread counterparty risk.

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8
Q

There are a number of drawbacks to swaps:

  1. Direct access is limited to ___ ___
  2. Secondary market is ___
  3. Swaps have more ___risk
A

There are a number of drawbacks to swaps:

  1. Direct access is limited to institutional investors
  2. Secondary market is illiquid
  3. Swaps have more counterparty risk
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9
Q

Studies have found that commodity company stock have ___ returns and ___volatility than commodity futures. Additionally, commodity companies behave more like ___and (are/are not) good proxies for commodity futures.

A

Studies have found that commodity company stock have similar returns and higher volatility than commodity futures. Additionally, commodity companies behave more like equities and are not good proxies for commodity futures.

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10
Q

Equity returns of a commodity company are most correlating to the commodity when returns are ___.

A

Equity returns of a commodity company are most correlating to the commodity when returns are increasing.

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11
Q

High yield bonds of commodity companies have a ___ correlation to the commodities than investment grade bonds.

A

High yield bonds of commodity companies have a higher correlation to the commodities than investment grade bonds.

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12
Q

Index mutual funds can outperform their benchmarks by actively managing the investment’s ___.

A

Index mutual funds can outperform their benchmarks by actively managing the investment’s collateral.

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13
Q

Commodity based mutual funds usually have ___ fees ___ other mutual funds.

A

Commodity based mutual funds usually have similar fees to other mutual funds.

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14
Q

Commodity ETFs tend to charge ___ fees than mutual funds

A

Commodity ETFs tend to charge lower fees than mutual funds

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15
Q

Tracking errors are smallest for commodity ETFs that use ___ ___, followed by ___, then ___.

A

Tracking errors are smallest for commodity ETFs that use full replication, followed by futures, then swaps.

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16
Q

Commodity partnerships in the U.S. are often structured as ___ ___ ___.

A

Commodity partnerships in the U.S. are often structured as master limited partnerships.

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17
Q

MLPs (do/do not) have required distribution minimums.

A

MLPs do not have required distribution minimums.

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18
Q

MLPs are required to generate at least ___% of their income from activities from qualified sources.

A

MLPs are required to generate at least 90% of their income from activities from qualified sources.

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19
Q

MLPs finance their growth using the ___ ___, which can ___stakes for existing LPs

A

MLPs finance their growth using the capital markets, which can dilute stakes for existing LPs

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20
Q

___ ___-___notes are debt instruments that, at maturity, pay principal and a return based on the performance of a commodity or basket of commodities over a certain time period. They may be ___-___bonds.

A

Commodity index-linked notes are debt instruments that, at maturity, pay principal and a return based on the performance of a commodity or basket of commodities over a certain time period. They may be zero-coupon bonds.

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21
Q

Commodity index-linked investments have ___ minimums than swaps.

A

Commodity index-linked investments have smaller minimums than swaps.

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22
Q

Commodity index-linked notes have an active ___ ___.

A

Commodity index-linked notes have an active secondary market.

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23
Q

Commodity index-linked notes (do/do not) require posting of collateral.

A

Commodity index-linked notes do not require posting of collateral.

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24
Q

___ ___-___ notes are commodity-linked debt instruments traded on an exchange.

A

Commodity exchange-traded notes are commodity-linked debt instruments traded on an exchange.notes are debt instruments traded on an exchange.

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25
Q

___ are issued by financial institutions that promise to pay a return on an index and then repay the principal at maturity.

A

ETNs are issued by financial institutions that promise to pay a return on an index and then repay the principal at maturity.

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26
Q

ETNs are exposed to ___ risk from the issuer.

A

ETNs are exposed to credit risk from the issuer.

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27
Q

ETNs have ___ counterparty risk than swaps.

A

ETNs have higher counterparty risk than swaps.

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28
Q

The key advantage of ETNs is that there is little ___ ___.

A

The key advantage of ETNs is that there is little tracking error.

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29
Q

ETNs are often referred to as ___ ___ ___.

A

ETNs are often referred to as prepaid forward contracts.

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30
Q

ETNs may qualify for ___-___ tax treatment.

A

ETNs may qualify for long-term tax treatment.

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31
Q

An economically equivalent alternative to ETNs are ___-___ ___ ___ on commodity indexes.

A

An economically equivalent alternative to ETNs are index-linked futures contracts on commodity indexes.

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32
Q

___-___funds in ___ markets buy and hold undervalued commodity futures contracts in unhedged portfolios.

A

Long-biased funds in futures markets buy and hold undervalued commodity futures contracts in unhedged portfolios.

33
Q

Long-biased funds in futures markets lock ups are ___, liquidity is ___and transparency is ___relative to other hedge funds.

A

Long-biased funds in futures markets lock ups are short, liquidity is high and transparency is high relative to other hedge funds.

34
Q

___-___funds in ___ markets buy, store and transport physical commodities.

A

Long-biased funds in physical markets buy, store and transport physical commodities.

35
Q

Equation for daily performance on a leveraged ETF

A
36
Q

Value of levered ETF after T days (equation)

A
37
Q

___ ___are index-linked notes that also may offer leveraged exposure to a commodity index.

A

Leveraged notes are index-linked notes that also may offer leveraged exposure to a commodity index.

38
Q

___-___ ___are index-linked notes that provide a downside guarantee of payment of some or all of the principal at the note’s maturity and provide an upside of profit if the commodity price increases.

A

Principal-guaranteed notes are index-linked notes that provide a downside guarantee of payment of some or all of the principal at the note’s maturity and provide an upside of profit if the commodity price increases.

39
Q

Principal-guaranteed notes have two structures:

  1. ___ and ___Strategy (or ___note)
  2. ___ ___(or ___ ___ ___ ___[___])
A

Principal-guaranteed notes have two structures:

  1. Cash and Call Strategy (or participation note)
  2. Dynamic Strategy (or constant proportion portfolio insurance [CPPI])
40
Q

The most commonly used structure of principal guaranteed notes is the ___ and ___strategy.

A

The most commonly used structure of principal guaranteed notes is the cash and call strategy.

41
Q

The ___ and ___strategy entails issuers buying maturity and principal-matched zero-coupon bonds and holding them until maturity, and buying call options linked to a commodity index.

A

The cash and call strategy entails issuers buying maturity and principal-matched zero-coupon bonds and holding them until maturity, and buying call options linked to a commodity index.

42
Q

The ___ ___changes the size of the commodity investment depending on the cost of insuring the principal guarantee.

A

The dynamic strategy changes the size of the commodity investment depending on the cost of insuring the principal guarantee.

43
Q

Traditional commodity indices are ___ only, infrequently ___and ignore ___ ___ or ___schemes.

A

Traditional commodity indices are long only, infrequently rebalanced and ignore term structure or weight schemes.

44
Q
A
45
Q

Commodity indices have 8 possible sources of return:

  1. B
  2. R
  3. S
  4. D
  5. D
  6. W
  7. M
  8. C
A

Commodity indices have 8 possible sources of return:

1. Beta

2. Roll

3. Spot

4. Dynamic asset allocation

5. Diversification

6. Weighting

7. Maturity

8. Collateral

46
Q

___ is the return associated with holding a futures contract until its roll date and then rolling the exposure to the next active front-month futures contract.

A

Beta is the return associated with holding a futures contract until its roll date and then rolling the exposure to the next active front-month futures contract.

47
Q

___ is the profit/loss associated with holding a futures contract due to a change in basis. It may be considered as being generated from moving up and down the forward curve.

A

Roll is the profit/loss associated with holding a futures contract due to a change in basis. It may be considered as being generated from moving up and down the forward curve.

48
Q

Commodities that are difficult to store usually are ___ and have ___roll yields.

A

Commodities that are difficult to store usually are backwardated and have positive roll yields.

49
Q

Indices (could/should not) be designed solely based on roll returns.

A

Indices should not be designed solely based on roll returns.

50
Q

___ return is the difference between an index’s excess return and roll return.

A

Spot return is the difference between an index’s excess return and roll return.

51
Q

Spot returns (do/do not) contribute significantly to total returns.

A

Spot returns do not contribute significantly to total returns.

52
Q

Common strategies for ___ ___ ___ ___ include momentum and mean reversion.

A

Common strategies for dynamic asset allocation models include momentum and mean reversion.

53
Q

Commodity index weights should be selected based on ___ ___

A

Commodity index weights should be selected based on economic rationale

54
Q

___ significantly affects an index’s spot return.

A

Maturity significantly affects an index’s spot return.

55
Q

Indices based on longer-term futures contracts have lower ___ and tend to ___

A

Indices based on longer-term futures contracts have lower betas and tend to underperform

56
Q

Commodity indices may lack the ___required by large institutional investors since they are more ___.

A

Commodity indices may lack the capacity required by large institutional investors since they are more illiquid.

57
Q

A ___ based index has fixed component weights.

A

A value based index has fixed component weights.

58
Q

A ___ based index holds a fixed number of contracts for each commodity.

A

A quantity based index holds a fixed number of contracts for each commodity.

59
Q

A ___ ___index tacks the performance of a fully collateralized portfolio of commodity futures.

A

A total return index tacks the performance of a fully collateralized portfolio of commodity futures.

60
Q

An ___ ___index is linked to the price movements of a portfolio of commodity futures contracts and provides a return over cash.

A

An excess return index is linked to the price movements of a portfolio of commodity futures contracts and provides a return over cash.

61
Q

Newer indices position themselves ___ on the forward curve and/or hold their positions for ___than first generation indices.

A

Newer indices position themselves further on the forward curve and/or hold their positions for longer than first generation indices.

62
Q

Passive long commodity indices perform poorly when roll return is ___.

A

Passive long commodity indices perform poorly when roll return is negative.

63
Q

To improve performance of passive strategies, some products have been developed using ___-___methods.

A

To improve performance of passive strategies, some products have been developed using curve-neutral methods.

64
Q

Large futures positions in indices are typically rolled over ___ days.

A

Large futures positions in indices are typically rolled over several days.

65
Q

___ generation commodity indices add active commodity selection as an additional enhancement.

A

Third generation commodity indices add active commodity selection as an additional enhancement.

66
Q

___ generation commodity indices aim to enhance returns using forward curve positioning.

A

Second generation commodity indices aim to enhance returns using forward curve positioning.

67
Q

The ___ ___technique identifies mid- to long-term contracts and holds them until close to expiration.

A

The enhanced roll technique identifies mid- to long-term contracts and holds them until close to expiration.

68
Q

The ___ ___technique invests in several contracts across the futures curve and avoids the steepest part of the term structure.

A

The constant expiration technique invests in several contracts across the futures curve and avoids the steepest part of the term structure.

69
Q

The ___ ___ ___ technique selects the futures contract with the most attractive roll yield.

A

The implied roll yield technique selects the futures contract with the most attractive roll yield.

70
Q

The Merrill Lynch Commodity Index eXtra is an example of a ___ generation index.

A

The Merrill Lynch Commodity Index eXtra is an example of a second generation index.

71
Q

___-based roll techniques are used by ___ generation commodity indices and establishes positions based on momentum.

A

Momentum-based roll techniques are used by third generation commodity indices and establishes positions based on momentum.

72
Q

The ___ ___ roll technique is used by ___ generation commodity indices and goes long commodities with the steepest backwardation forward curves and shorts commodities with greatest degree of contango.

A

The term structure roll technique is used by third generation commodity indices and goes long commodities with the steepest backwardation forward curves and shorts commodities with greatest degree of contango.

73
Q

The ___ ___roll technique is used by ___generation indices and balances long and short positions to maintain a net market-neutral position.

A

The market neutral roll technique is used by third generation indices and balances long and short positions to maintain a net market-neutral position.

74
Q

The ___ ___roll technique is used by ___generation indices and determines commodity weights using fundamental and technical analysis

A

The rule based roll technique is used by third generation indices and determines commodity weights using fundamental and technical analysis

75
Q

The CYD Long-Short TR Index is an example of a ___ ___, ___generation commodity index, which equally weights long positions in ___ commodities and short positions in ___commodities.

A

The CYD Long-Short TR Index is an example of a term structure third, generation commodity index, which equally weights long positions in backwardated commodities and short positions in contangoed commodities.

76
Q

___ return is the percentage change in the market value of the futures contracts held in the index at the end of the trading session, but before accounting for index changes.

A

Excess return is the percentage change in the market value of the futures contracts held in the index at the end of the trading session, but before accounting for index changes.

77
Q

Realized roll return is ___ on most days.

A

Realized roll return is zero on most days.

78
Q

Realized roll return =

A