Flashcards in Commodity Futures Deck (17):
(1) Physical assets are direct investment in tangible assets; (2) Typically included are investments in real estate, food, fiber, metals, agricultural products, etc.
(1) Indirect, paper investments in businesses, (2) Represented by a proportional ownership interest in either (3) the equity or debt of the underlying business.
(1) A contract that provides for the future exchange of an asset in the future (2) at a specified delivery date (3) for a specified payment amount.
Current price of an asset in the cash market if you were buying a commodity right now "on the spot."
Price of a contract for future delivery
When an investor purchases a contract for future delivery
When an investor sells a contract for future delivery
(1) One who speculates in the futures market to earn profits; (2) speculators rarely take delivery of assets
(1) One who is not trying to speculate, but rather (2) hedge to reduce or completely offset their risk exposure to an underlying asset.
Daily Price Limit
The maximum price a futures contract may go up or down relative to the settlement price of the previous day.
(1) The number of futures contracts in existence on any given day. (2) A new buyer and seller would increase open interest, whereas (3) a buyer an seller closing out their position would decrease open interest
A settlement process whereby any increase or decrease in account equity is adjusted for daily changes in the price of the underlying asset.
Major Sources of Risk in Commodities
The major sources of risk are (1) business and (2) financial risk.
Commodity benefits on Portfolio Construction
(1) Commodities have low positive, or negative correlations with stocks and bonds. (2) Adding Stock reduces portfolio standard deviation. (3) Commodities typically have high correlation with inflation.
Nonspeculative Commodity Portfolio
(1) The portfolio should be long only, with no short positions; (2) it should be broadly diversified; (3) and it should not use leverage.
Commodities Benchmark limiting the concentration of Energy
(1) The DJ-AID index specifies a maximum of 33% invested in a single index; (2) This helps reduce the percentage of energy concentration that is typical in other indexes