CAIA - 23 - Allocation to Commodities Flashcards
The risk of commodity futures positions can be reduced significantly by fully ___ the positions.
The risk of commodity futures positions can be reduced significantly by fully collateralizing the positions.
The correlation of commodities to a traditional stock/bond portfolio ___ as time increases.
The correlation of commodities to a traditional stock/bond portfolio decreases as time increases.
In recent years, correlations of commodities to stocks/bonds has ___ due to ___.
In recent years, correlations of commodities to stocks/bonds has increased due to financialization.
Returns for spot contracts are ___ than for futures contracts.
Returns for spot contracts are lower than for futures contracts.
Commodities are ___ diversifiers than most institutional real estate.
Commodities are better diversifiers than most institutional real estate.
Commodity futures have the added benefit of ___ that many alternative investments lack.
Commodity futures have the added benefit of liquidity that many alternative investments lack.
Agricultural commodities are affected (a lot/very little) by the business cycle.
Agricultural commodities are affected very little by the business cycle.
Industrial commodities are affected (a lot/very little) by the business cycle.
Industrial commodities are affected a lot by the business cycle.
Compared to stock and bond returns, commodity returns are (more/less) predictable in the stages of the business cycle.
Compared to stock and bond returns, commodity returns are more predictable in the stages of the business cycle.
In late expansion and early recession phases, commodities typically ___ stocks and bonds.
In late expansion and early recession phases, commodities typically outperform stocks and bonds.
In late recession or early expansion phases, commodities typically ___ stocks and bonds.
In late recession or early expansion phases, commodities typically underperform stocks and bonds.
Active strategies can be implemented to exploit the different performances of the business cycle:
- Late expansion: long ___ and short ___
- Early recession: long ___and short ___
- Late recession: long ___and short ___
- Early expansion: long ___and short ___
Active strategies can be implemented to exploit the different performances of the business cycle:
- Late expansion: long commodities and short bonds
- Early recession: long commodities and short stocks
- Late recession: long bonds and short commodities
- Early expansion: long stocks and short commodities
Commodity prices are typically ___ affected by events such as natural disasters, political unrest, and economic stress.
Commodity prices are typically positively affected by events such as natural disasters, political unrest, and economic stress.
___ ___is the enhanced average or expected geometric mean return that results from rebalancing a portfolio.
Diversification return is the enhanced average or expected geometric mean return that results from rebalancing a portfolio.
Long positions should only be taken in commodities that exhibit ___ or have ___inventory levels.
Long positions should only be taken in commodities that exhibit backwardation or have low inventory levels.
Commodity prices have ___ skewed returns.
Commodity prices have positively skewed returns.
Commodities have ___ kurtosis
Commodities have higher kurtosis
Commodity trading strategies are either ___ strategies or ___ ___ strategies.
Commodity trading strategies are either directional strategies or relative value strategies.
___ strategies take positions exposed to systematic risk based on forecasts of market direction.
Directional strategies take positions exposed to systematic risk based on forecasts of market direction.
___ ___strategies aim to identify and trade mispriced assets and to hedge away some or all market exposure.
Relative value strategies aim to identify and trade mispriced assets and to hedge away some or all market exposure.
Directional strategies typically use listed or OTC ___.
Directional strategies typically use listed or OTC derivatives.
Directional strategies can either be ___ or ___.
Directional strategies can either be fundamental or quantitative.
___ ___strategies make allocations based on analysis of supply-demand factors and are typically based on macroeconomic or industry-specific factors.
Fundamental directional strategies make allocations based on analysis of supply-demand factors and are typically based on macroeconomic or industry-specific factors.
___ ___strategies use technical or quantitative models to identify over and underpriced commodities based on projected spot prices or mispriced futures term structures.
Quantitative directional strategies use technical or quantitative models to identify over and underpriced commodities based on projected spot prices or mispriced futures term structures.
A ___ ___strategy is a long/short strategy that estimates the potential returns using the price difference between front and second nearest future contracts.
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.
Estimating potential risk premium embedded in futures prices is ___ difficult than estimating roll yield.
Estimating potential risk premium embedded in futures prices is more difficult than estimating roll yield.
Relative value strategies can be implemented across ___, ___or ___.
Relative value strategies can be implemented across time, correlation or location.
___ ___are strategies that exploit trading opportunities based on relative commodity prices that can be executed in derivatives markets.
Commodity spreads are strategies that exploit trading opportunities based on relative commodity prices that can be executed in derivatives markets.
A ___ spread takes long and short positions in futures contracts with different delivery dates.
A calendar spread takes long and short positions in futures contracts with different delivery dates.
Calendar spreads provide ___, ___, or ___ a ___.
Calendar spreads provide insurance, liquidity, or express a view.
There is typically a ___ of near-term futures contracts and a ___of second-deferred futures contracts.
There is typically a surplus of near-term futures contracts and a shortage of second-deferred futures contracts.
Since 2006, profitability of pre-roll strategies has ___ significantly.
Since 2006, profitability of pre-roll strategies has dropped significantly.
In a ___ spread, the price of the near-term contract is expected to increase relative to deferred contracts. This is in contrast to ___spreads.
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.
___ spreads strive to exploit the relative price difference between a commodity and the products it produces.
Processing spreads strive to exploit the relative price difference between a commodity and the products it produces.
___ futures positions hedge against rising input prices. ___positions hedge against falling output prices.
Long futures positions hedge against rising input prices. Short positions hedge against falling output prices.
A ___ spread involves taking long positions in crude oil futures and short positions in gasoline and heating oil futures.
A crack spread involves taking long positions in crude oil futures and short positions in gasoline and heating oil futures.
A ___ spread involves long positions in soybean futures and short positions in soybean oil futures and soybean meal futures.
A crush spread involves long positions in soybean futures and short positions in soybean oil futures and soybean meal futures.
A ___ spread involves trades between commodities that can be substituted for one another.
A substitution spread involves trades between commodities that can be substituted for one another.
___ spreads are based on the premise of a stable relative pricing relationship between the substitutable commodities.
Substitution spreads are based on the premise of a stable relative pricing relationship between the substitutable commodities.
Substitution spread trades are ___ than processing or calendar spreads.
Substitution spread trades are riskier than processing or calendar spreads.
When conducting a substitution spread, the ratio of the 2 commodities must first be ___, which is carried out by taking the ___ ___ of the ratio.
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.
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.
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.
100-day statistic for spread trade (equation)
Entering a spread trade long means going long the ___ and shorting the ___
Entering a spread trade long means going long the numerator and shorting the denominator
___ spreads are spreads across different grades of the same commodity.
Quality spreads are spreads across different grades of the same commodity.
___ spreads trade the same commodity at different delivery and storage locations.
Location spreads trade the same commodity at different delivery and storage locations.
Without a time lag, the location spread is a ___ trade.
Without a time lag, the location spread is a correlation trade.
A ___ strategy involves buying a physical commodity and storing in a leased storage facility until a delivery date.
A storage strategy involves buying a physical commodity and storing in a leased storage facility until a delivery date.
___ strategies physically move a commodity from one location where it is in surplus to another location where it is in storage.
Transportation strategies physically move a commodity from one location where it is in surplus to another location where it is in storage.
Transportation strategies use ___ commodity markets along with ___transportation services.
Transportation strategies use spot commodity markets along with leased transportation services.
Storage and transportation have the following unique risks:
- ___ risk
- Risk of storing and transporting ___ ___
- Must not appear to ___the ___
Storage and transportation have the following unique risks:
- Credit risk
- Risk of storing and transporting hazardous materials
- Must not appear to manipulate the market
Commodity based corporations are typically valued as the sum of its ___ ___and ___ ___
Commodity based corporations are typically valued as the sum of its commodity rights and enterprise value
___ 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.
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.
Selective hedging introduces ___ into a firm’s commodity exposure.
Selective hedging introduces nonlinearity into a firm’s commodity exposure.
___ ___ strives to add value by adjusting a firm’s physical activities in response to commodity price changes.
Operational hedging strives to add value by adjusting a firm’s physical activities in response to commodity price changes.
___ ___involves commodity-based firms diversifying across commodities or across business and risk exposure.
Operational diversification involves commodity-based firms diversifying across commodities or across business and risk exposure.
Highly vertically integrated firms typically have ___ commodity price exposure.
Highly vertically integrated firms typically have less commodity price exposure.
___ ___ ___ are direct producers of commodities.
Upstream commodity producers are direct producers of commodities.
___ ___ ___ process or refine commodities into a marketable product.
Downstream commodity producers process or refine commodities into a marketable product.
