Commodities

Question 1

What is the difference between commodities and other types of assets?

Answer 1

You have to take into account the cost of storage and the cost of transportation

Question 1

What specificities futures on commodities must account for?

Answer 1

The cost of storage is usually high
It’s difficult to short or borrow some commodities
The possession of consumable commodities has a special value since they can be consumed

Question 2

How do we call the advantage of holding the physical asset?

Answer 2

The convenience yield

Question 3

How do you calculate the futures price for precious metal?

Answer 3

You ignore storage costs (low) and have: Spot*(1+rf)

Question 4

What is the no-arbitrage arguement?

Answer 4

Two types of arbitrage:

F>Spot*(1+rf), you can buy the commodities at spot price and enter a forward contract to sell it later

F<Spot*(1+rf), you can sell at spot price and enter a forward contract to buy later

Question 5

What is the lease rate of a commodity?

Answer 5

The interest rate charged to borrow the underlying asset

Question 6

How does the lease rate interact with commodity futures/forwards?

Answer 6

A producer enters a forward contract with a bank to sell gold in the future at a predetermined price

The bank hedges the gold price risk by borrowing gold for the duration of the foward contract and selling it at spot price

the bank now has long and short forward contracts that cancel each out

Question 7

How do you calculate futures price with the lease rate?

Answer 7

F=Spot*((1+rf)/(1+lr))

Question 8

What does the cost of carry reflect?

Answer 8

the financing costs, the storage costs, and the gain of carry

Question 9

How do you calculate cost of carry?

Answer 9

c=rf+u-d where
u=storage
d=gain of carry

Question 10

What relation must verify a futures’ price to be fair

Answer 10

F=spot+c-inflows

Here the convenience yield is an intangible inflow

Question 11

What is the convenience yield?

Answer 11

the benefit of hoilding the underlying asset/good of a derivatives contract rather than the contract itself

Question 12

What question does the convenience yield answer?

Answer 12

if the commodity were an asset, what yield y would explain the futures price?

Question 13

What must the convenience yield y satisfy?

Answer 13

F=Spot*(((1+rf)^t)/(1+y)^t))

Question 14

How is the convenience yield estimated?

Answer 14

as an annualized % that the commodity can earn by being stored and ready to deliver

Question 15

What can impact the convenience yield?

Answer 15

The market’s expectations related to the commodity’s future availability

aka if the market thinks the commodity will be scarce in the future participants will prefer to have the commodity (y rises, S rises due to higher demand)

Question 16

How is the relationship between the convenience yield and the futures price?

Answer 16

It’s inverse: If y goes up then F goes down and viceversa

Question 17

What is the future’s price formula using exp?

Answer 17

F=spote^((rf+u-y)(T-t))
where T-t is the leftover maturity

Question 18

What are the different types of commodities?

Answer 18

Soft commodities: agricultural, non-mining, non-energy

Hard commodities: all items obtained through extraction (precious and industrial metals, energy)

Emerging commodities (not yet highly liquid)

Carbon certificates

Question 19

How do you call it when F > Spot price?

Answer 19

Contango

Question 20

How do you call it when F < Spot price?

Answer 20

Backwardation