Commodities Flashcards

Question

What sign is Basis when future\>spot

Answer 1

1. Market price for delivery in the future 2. Futures price = Spot + cost of carry - convenience (of current possession, inventory) 3. If having inventory is a benefit, Futures price goes lower 4. If storage costs fall, Futures price goes lower 5. If having inventory is not a benefit, convenience = 0 therefore Futures price = Spot + cost of carry

Answer 2

Value of having the commodity now (+) rather than in the future, 0

Answer 3

Basis = (Future - Spot) (Future - Spot) = ( cost of carry - convenience) If Basis is positive, cost of carry \> convenience If Basis is negative, convenience \> convenience

Answer 4

1. Future \> Spot 2. Premium rewards the producer for holding the product for longer 3. The convenience yield \< cost of storage

Answer 5

1. Spot \> Future 2. Convenience yield \> Cost of storage 3. The discount is to reward the buyer for the inconvenience of taking delivery later

Answer 6

1. Both Spot and Futures prices move in the same direction 2. Spot will move by a greater % than Futures

Answer 7

They converge

Answer 8

Calendar spread

Answer 9

1. Insurance Theory (Keynes) 2. The discount is a premium to the Buyer for providing insurance to Sellers. 3. No. Contango is normal.

Answer 10

1. Extends Insurance Theory 2. Includes both long and short as hedgers to explain supply vs demand pressures 3. Contango if Consumer hedging demand dominates, too many hedgers long, bidding up future, F\>S 4. Backwardation if Producer hedging demand dominates, too many hedgers short, bidding down the future, F

Answer 11

1. Futures = Spot + Storage costs - convenience yield 2. Producers transfer storage costs to future buyers. This explains contango. 3. Buyers delay purchase if there is no value in having inventory and would incur storage costs for no benefit 4. Convenience yield is positive if there is a benefit for the consumer to hold the commodity now. This explains backwardation.

Answer 12

Monitor market participants to ensure 1. Efficiency 2. Fairness

Answer 13

1. Speculators are informed Investors 2. Speculators have No natural position in spot market 3. Speculators Trade on expectations of future commodity prices 4. Hedgers only take positions when they expect markets to move against their natural position

Answer 14

1. Information for investors, fundamental and TA, volatility, supply a D demand forecasts 2. Inflation research, valuable for investors, financial institutions and governments (monetary & fiscal policies)

Answer 15

1. Have access to storage and or transportation 2. Take a position for a risk free profit because the real costs of carry are different to the costs implied in the futures price

Answer 16

"The PRC is the future" Price return Roll return Collateral return

Answer 17

1. This is called the Spot Yield = (P₂-P₁)/P₁ = (P₂/P₁-1) 2. The percentage change in spot price during the period the contract is held 3. The percentage change in price of the current (the near term futures) contract while held by the investor 4. Typically measured by the near-term contract which is a proxy for the Spot yield

Answer 18

Gross Roll = Net Roll x #days rolling

Answer 19

The percentage change in price from the current contract when rolled to another contract Roll Return % = (F_{new contract}/ F_{current contract)} -1

Answer 20

**Net Roll Return** is the *percentage of total exposure rolled in the measurement period* (1 day) **Net Roll Return** = Gross Roll Return / (#measurement periods during roll) e.g. 10 days rolling a total Gross Roll Return of 10% gives a Net Roll Return of 1% per day

Answer 21

1. The hedgers will pay more for each new contract in the next period because the market is in Contango 2. Since F_m+1 \> F_m Roll Return will be Negative 3. Hedger will buy fewer contracts when rolling in Contango because the same $ amount is worth fewer new contracts

Answer 22

1. The hedgers will pay less for each contract in the next period because the market is in Backwardation 2. Since Fm+1 \< Fm Roll Return will be Positive 3. Hedger will buy more contracts when rolling in Backwardation because the same $ amount is worth more new contracts

Answer 23

The return paid to the holder of the contracts on the assets it has used for margin during the period it has held the contract

Answer 24

Roll Return is a function of both Spot and Future rates, because Spot influences the Futures price.

Answer 25

1. **Sector** dependant 2. **Energy** sector is **volatile** and has a *high statistical probability* of generating **positive Roll Returns**

Answer 26

1. Commodities Swaps **transfer risk** by adjusting exposure to a commodity - whereas futures manage risk (hedge) 2. They are **cash settled** 3. No daily settlement 4. **Customized** between two parties

Answer 27

**NET = – FIXED + (P-R)** Price P, where P above a reference price, R The parties **swap a fixed payment** for a *variable payment* when the _current market price is above a reference price_. For example: An **Oil producer receives fixed**. This is like _writing call options_. For the **receiver of variable,** they pay Fixed to own future cash flows similar to _owning a series of call options_.

Answer 28

**NET = – FIXED + INDEX RETURN** The receiver pays FIXED for a stream of future cash flows equal to the return on the Index Typically used by Institutional Investors to gain commodity exposure

Answer 29

**NET = – BASIS_{Comm #1} + BASIS_{Comm #2}** Two commodities are not highly correlated Usually the commodities have different levels of liquidity, one commodity having a futures contract for hedging and the other commodity not having a hedge instrument Essentially combining the Basis swap with a futures position allows the illiquid commodity to be better hedged.

Answer 30

**NET = – VARIANCE_{Comm #1} + VARIANCE_{Comm #2}** This is a **relative volatility bet**

Answer 31

**NET = – VOL \< V_ref + VOL \>V_ref** Swaps actual volatility below a threshold for future volatility if it rises above a threshold

Answer 32

The following affect Commodity index returns 1. Should be investible, with **liquid** futures contracts 2. The actual **mix** of commodities included (selection) 3. Weighting methodology - e.g. **value weighting** emphasises Energy companies returns 4. Rebalancing methodology - capturing trends or mean-reversion or volatility 5. Rolling methodology - alpha from Roll Yield

Answer 33

**Passive Rolling** strategies will _roll into the near month_ and have *little effect on returns* **_Active Rolling_** strategies will select contract months _out into the future_ to: a) either **maximise backwardation** or b) **minimise contango**

Answer 34

In general if **short-term price action is choppy or mean-reverting** and **long-term price action is trending** then 1. Frequent rebalancing during **trending markets** *_reduces returns by capturing less of the trend_* 2. Rebalancing during **choppy** or **mean-reverting markets** *_increases returns_* **when** * (a)* **monthly rebalancing** - *_mean reversion occurs more than once per month (within periods less than 1 month)_* * (b) **annual rebalancing***- *_mean reversion is multi-year_* and occurs *less than once per year* and *_more trend following*_ is _*captured_*

Answer 35

The S&P GS Commodity Index has **24 Commodities** Uses: A **Production** or **Value Weighting** method Near **most-liquid-month** roll method - most subject to Economic shocks Rebalances **ANNUALLY**

Answer 36

The Bloomberg Commodity Index has **22 Commodities** Uses: A **selection** based **Production** and **Liquidity** Weighting method - less exposure to Oil than GSCI **Front-month to 1^st or 2^nd-mont**h roll method Rebalances **ANNUALLY**

Answer 37

The Deutsche Bank Commodity Index has **14 Commodities** Uses: A **FIXED Weight** method **Optimised** roll method to **maximise Roll yield** - *backwardation maximised*, _contango minimised_ Rebalances **ANNUALLY**

Answer 38

The Reuters Commodity Index has **19 Commodities** Uses: A **selection** and **liquidity** based, **FIXED Weight** method **Front-month to first or second-month** roll method Rebalances **MONTHLY** **No investor funds** **ETF**

Answer 39

The Rogers Commodity Index has **37 Commodities** Uses: **A selection based (including foreign commodities and liquidity) FIXED Weight** method **Front-month to next-month**_roll method_ Rebalances **MONTHLY** **No investor funds** **No ETC**

Commodities Flashcards

Intro level 2