CAIA - 23 - Allocation to Commodities

Question 1

The risk of commodity futures positions can be reduced significantly by fully ___ the positions.

Answer 1

The risk of commodity futures positions can be reduced significantly by fully collateralizing the positions.

Question 2

The correlation of commodities to a traditional stock/bond portfolio ___ as time increases.

Answer 2

The correlation of commodities to a traditional stock/bond portfolio decreases as time increases.

Question 3

In recent years, correlations of commodities to stocks/bonds has ___ due to ___.

Answer 3

In recent years, correlations of commodities to stocks/bonds has increased due to financialization.

Question 4

Returns for spot contracts are ___ than for futures contracts.

Answer 4

Returns for spot contracts are lower than for futures contracts.

Question 5

Commodities are ___ diversifiers than most institutional real estate.

Answer 5

Commodities are better diversifiers than most institutional real estate.

Question 6

Commodity futures have the added benefit of ___ that many alternative investments lack.

Answer 6

Commodity futures have the added benefit of liquidity that many alternative investments lack.

Question 7

Agricultural commodities are affected (a lot/very little) by the business cycle.

Answer 7

Agricultural commodities are affected very little by the business cycle.

Question 8

Industrial commodities are affected (a lot/very little) by the business cycle.

Answer 8

Industrial commodities are affected a lot by the business cycle.

Question 9

Compared to stock and bond returns, commodity returns are (more/less) predictable in the stages of the business cycle.

Answer 9

Compared to stock and bond returns, commodity returns are more predictable in the stages of the business cycle.

Question 10

In late expansion and early recession phases, commodities typically ___ stocks and bonds.

Answer 10

In late expansion and early recession phases, commodities typically outperform stocks and bonds.

Question 11

In late recession or early expansion phases, commodities typically ___ stocks and bonds.

Answer 11

In late recession or early expansion phases, commodities typically underperform stocks and bonds.

Question 12

Active strategies can be implemented to exploit the different performances of the business cycle:

1. Late expansion: long ___ and short ___
2. Early recession: long ___and short ___
3. Late recession: long ___and short ___
4. Early expansion: long ___and short ___

Answer 12

Active strategies can be implemented to exploit the different performances of the business cycle:

1. Late expansion: long commodities and short bonds
2. Early recession: long commodities and short stocks
3. Late recession: long bonds and short commodities
4. Early expansion: long stocks and short commodities

Question 13

Commodity prices are typically ___ affected by events such as natural disasters, political unrest, and economic stress.

Answer 13

Commodity prices are typically positively affected by events such as natural disasters, political unrest, and economic stress.

Question 14

___ ___is the enhanced average or expected geometric mean return that results from rebalancing a portfolio.

Answer 14

Diversification return is the enhanced average or expected geometric mean return that results from rebalancing a portfolio.

Question 15

Long positions should only be taken in commodities that exhibit ___ or have ___inventory levels.

Answer 15

Long positions should only be taken in commodities that exhibit backwardation or have low inventory levels.

Question 16

Commodity prices have ___ skewed returns.

Answer 16

Commodity prices have positively skewed returns.

Question 17

Commodities have ___ kurtosis

Answer 17

Commodities have higher kurtosis

Question 18

Commodity trading strategies are either ___ strategies or ___ ___ strategies.

Answer 18

Commodity trading strategies are either directional strategies or relative value strategies.

Question 19

___ strategies take positions exposed to systematic risk based on forecasts of market direction.

Answer 19

Directional strategies take positions exposed to systematic risk based on forecasts of market direction.

Question 20

___ ___strategies aim to identify and trade mispriced assets and to hedge away some or all market exposure.

Answer 20

Relative value strategies aim to identify and trade mispriced assets and to hedge away some or all market exposure.

Question 21

Directional strategies typically use listed or OTC ___.

Answer 21

Directional strategies typically use listed or OTC derivatives.

Question 22

Directional strategies can either be ___ or ___.

Answer 22

Directional strategies can either be fundamental or quantitative.

Question 23

___ ___strategies make allocations based on analysis of supply-demand factors and are typically based on macroeconomic or industry-specific factors.

Answer 23

Fundamental directional strategies make allocations based on analysis of supply-demand factors and are typically based on macroeconomic or industry-specific factors.

Question 24

___ ___strategies use technical or quantitative models to identify over and underpriced commodities based on projected spot prices or mispriced futures term structures.

Answer 24

Quantitative directional strategies use technical or quantitative models to identify over and underpriced commodities based on projected spot prices or mispriced futures term structures.

Question 25

A ___ \_\_\_strategy is a long/short strategy that estimates the potential returns using the price difference between front and second nearest future contracts.

Answer 25

A **roll return** strategy is a long/short strategy that estimates the potential returns using the price difference between front and second nearest future contracts.

Question 26

Estimating potential risk premium embedded in futures prices is ___ difficult than estimating roll yield.

Answer 26

Estimating potential risk premium embedded in futures prices is **more** difficult than estimating roll yield.

Question 27

Relative value strategies can be implemented across \_\_\_, \_\_\_or \_\_\_.

Answer 27

Relative value strategies can be implemented across **time**, **correlation** or **location**.

Question 28

\_\_\_ \_\_\_are strategies that exploit trading opportunities based on relative commodity prices that can be executed in derivatives markets.

Answer 28

**Commodity spreads** are strategies that exploit trading opportunities based on relative commodity prices that can be executed in derivatives markets.

Question 29

A ___ spread takes long and short positions in futures contracts with different delivery dates.

Answer 29

A **calendar** spread takes long and short positions in futures contracts with different delivery dates.

Question 30

Calendar spreads provide \_\_\_, \_\_\_, or ___ a \_\_\_.

Answer 30

Calendar spreads provide **insurance**, **liquidity**, or **express** a **view**.

Question 31

There is typically a ___ of near-term futures contracts and a \_\_\_of second-deferred futures contracts.

Answer 31

There is typically a **surplus** of near-term futures contracts and a **shortage** of second-deferred futures contracts.

Question 32

Since 2006, profitability of pre-roll strategies has ___ significantly.

Answer 32

Since 2006, profitability of pre-roll strategies has **dropped** significantly.

Question 33

In a ___ spread, the price of the near-term contract is expected to increase relative to deferred contracts. This is in contrast to \_\_\_spreads.

Answer 33

In a **bull** spread, the price of the near-term contract is expected to increase relative to deferred contracts. This is in contrast to **bear** spreads.

Question 34

\_\_\_ spreads strive to exploit the relative price difference between a commodity and the products it produces.

Answer 34

**Processing** spreads strive to exploit the relative price difference between a commodity and the products it produces.

Question 35

\_\_\_ futures positions hedge against rising input prices. \_\_\_positions hedge against falling output prices.

Answer 35

**Long** futures positions hedge against rising input prices. **Short** positions hedge against falling output prices.

Question 36

A ___ spread involves taking long positions in crude oil futures and short positions in gasoline and heating oil futures.

Answer 36

A **crack** spread involves taking long positions in crude oil futures and short positions in gasoline and heating oil futures.

Question 37

A ___ spread involves long positions in soybean futures and short positions in soybean oil futures and soybean meal futures.

Answer 37

A **crush** spread involves long positions in soybean futures and short positions in soybean oil futures and soybean meal futures.

Question 38

A ___ spread involves trades between commodities that can be substituted for one another.

Answer 38

A **substitution** spread involves trades between commodities that can be substituted for one another.

Question 39

\_\_\_ spreads are based on the premise of a stable relative pricing relationship between the substitutable commodities.

Answer 39

**Substitution** spreads are based on the premise of a stable relative pricing relationship between the substitutable commodities.

Question 40

Substitution spread trades are ___ than processing or calendar spreads.

Answer 40

Substitution spread trades are **riskier** than processing or calendar spreads.

Question 41

When conducting a substitution spread, the ratio of the 2 commodities must first be \_\_\_, which is carried out by taking the ___ \_\_\_ of the ratio.

Answer 41

When conducting a substitution spread, the ratio of the 2 commodities must first be **normalized**, which is carried out by taking the **natural log** of the ratio.

Question 42

To determine if the spread has experienced a significant change, a ___ of \_\_\_is used, such as the difference of the substitution statistic from a \_\_\_-day moving average.

Answer 42

To determine if the spread has experienced a significant change, a **measure** of **stability** is used, such as the difference of the substitution statistic from a **100**-day moving average.

Question 43

100-day statistic for spread trade (equation)

Answer 43

Question 44

Entering a spread trade long means going long the ___ and shorting the \_\_\_

Answer 44

Entering a spread trade long means going long the **numerator** and shorting the **denominator**

Question 45

\_\_\_ spreads are spreads across different grades of the same commodity.

Answer 45

**Quality** spreads are spreads across different grades of the same commodity.

Question 46

\_\_\_ spreads trade the same commodity at different delivery and storage locations.

Answer 46

**Location** spreads trade the same commodity at different delivery and storage locations.

Question 47

Without a time lag, the location spread is a ___ trade.

Answer 47

Without a time lag, the location spread is a **correlation** trade.

Question 48

A ___ strategy involves buying a physical commodity and storing in a leased storage facility until a delivery date.

Answer 48

A **storage** strategy involves buying a physical commodity and storing in a leased storage facility until a delivery date.

Question 49

\_\_\_ strategies physically move a commodity from one location where it is in surplus to another location where it is in storage.

Answer 49

**Transportation** strategies physically move a commodity from one location where it is in surplus to another location where it is in storage.

Question 50

Transportation strategies use ___ commodity markets along with \_\_\_transportation services.

Answer 50

Transportation strategies use **spot** commodity markets along with **leased** transportation services.

Question 51

Storage and transportation have the following unique risks: 1. ___ risk 2. Risk of storing and transporting ___ \_\_\_ 3. Must not appear to \_\_\_the \_\_\_

Answer 51

Storage and transportation have the following unique risks: 1. **Credit** risk 2. Risk of storing and transporting **hazardous materials** 3. Must not appear to **manipulate** the **market**

Question 52

Commodity based corporations are typically valued as the sum of its ___ \_\_\_and ___ \_\_\_

Answer 52

Commodity based corporations are typically valued as the sum of its **commodity rights** and **enterprise value**

Question 53

\_\_\_ hedging is a direct hedging approach that strives to add value by market-timing the extent to which risk is hedged based on a projection of the commodity's price.

Answer 53

**Selective** hedging is a direct hedging approach that strives to add value by market-timing the extent to which risk is hedged based on a projection of the commodity's price.

Question 54

Selective hedging introduces ___ into a firm's commodity exposure.

Answer 54

Selective hedging introduces **nonlinearity** into a firm's commodity exposure.

Question 55

\_\_\_ ___ strives to add value by adjusting a firm's physical activities in response to commodity price changes.

Answer 55

**Operational hedging** strives to add value by adjusting a firm's physical activities in response to commodity price changes.

Question 56

\_\_\_ \_\_\_involves commodity-based firms diversifying across commodities or across business and risk exposure.

Answer 56

**Operational diversification** involves commodity-based firms diversifying across commodities or across business and risk exposure.

Question 57

Highly vertically integrated firms typically have ___ commodity price exposure.

Answer 57

Highly vertically integrated firms typically have **less** commodity price exposure.

Question 58

\_\_\_ ___ \_\_\_ are direct producers of commodities.

Answer 58

**Upstream commodity producers** are direct producers of commodities.

Question 59

\_\_\_ ___ \_\_\_ process or refine commodities into a marketable product.

Answer 59

**Downstream commodity producers** process or refine commodities into a marketable product.