Commodities Flashcards
Identify: Informed investors who either produce or use a commodity.
Hedgers
Identify: Seeks to exploit an informational advantage to profit from trading with hedgers. Provides liquidity to markets.
Speculators
Identify: These participants buy, sell and store commodities when there is mispricing between spot and futures prices.
Arbitrageurs
Identify: Operate globally to reflect worldwide production and consumption of commodities.
Exchanges
Identify: Perform analytical work for companies, governments and economic forecasters.
Analysts
Identify: Responsible for regulating the commodities markets.
Regulators (CFTC)
Identify hard versus soft commodities.
Hard
-Energy
-Industrial metals
-Precious metals
Soft
-Grains
-Livestock
-Cash Crops
Give 3 characteristics of commodities.
- Physical assets
- Have no cash flows
- Incur storage & transportation costs
The current spot price of a commodity is often the ____ value of the expected selling price at some future date.
The current spot price of a commodity is often the discounted value of the expected selling price at some future date.
Identify: Futures Price > Spot Price
Is there a negative or positive roll yield?
Contango
Negative Roll Yield
Identify: Spot Price > Futures Price
Is there a negative or positive roll yield?
Backwardation
Positive Roll Yield
Identify the return theory:
This theory states that futures prices will be less than spot prices to provide a return to those buying the futures. This theory leads to a market in backwardation.
Insurance Theory
Identify the return theory:
Participants’ hedging activities will drive returns.
Hedging Pressure Hypothesis
Identify the return theory:
This theory assumes storage costs will drive returns.
Theory of Storage
When producers’ hedging dominates, the market will be in _______. When users’ hedging dominates, the market will be in _____.
When producers’ hedging dominates, the market will be in backwardation. When users’ hedging dominates, the market will be in contango.
