Commodities1 - market; inflation Flashcards
Capacity is
the limit on the quantity of capital that can be deployed without substantially
diminished performance.
Inflation
is the decline in the value of money relative to the value of a general bundle of goods and services, such as oil.
Cash market
is any market in which transactions involve immediate payment and delivery: The Buyer immediately pays the price, and the seller immediately delivers the product.
Indirect commodity investments
are the most common method of obtaining commodity exposure involving equity, fixed income, and derivative instruments.
Counterparty risk
is the uncertainty associated with the economic outcomes of one party to a contract due to potential failure of the other side of the contract to fulfill its obligations, presumably due to insolvency or illiquidity.
Storage costs of physical commodities
involve such expenditures as warehouse fees, insurance, transportation, and spoilage.
Inflation risk
is the dispersion in economic outcomes caused by uncertainty regarding the value of a currency.
Inflation beta
is analogous to a market beta except that an index of price changes is used in place of the market index, creating a measure of the sensitivity of an asset’s returns to changes in inflation.
Expansion stage,
also called the development capital stage, is the stage of a company, when the firm may or may not have reached profitability, but has already established the technology and market for its new product.
Selective hedging
is the attempt to add value by market-timing the degree to which risk is hedged.
Commodity index swap
is an exchange of cash flows in which one of the cash flows is based on the price of a specific commodity or commodity index, whereas the other cash flow is fixed.
Duration
is a measure of the sensitivity of a fixed-income security to a change in the general level of interest rates.
Portable alpha
is the ability of a particular investment product or strategy to be used in the separation of alpha and beta.
Master limited partnerships, or MLPs,
are publicly traded investment pools that are structured as limited partnerships and that offer their owners pro rata claims. MLPs are frequently used to hold infrastructure assets, especially for energy distribution.
Prepaid forward contracts
are fully collateralized forward contracts for delivery.
Principal-guaranteed notes
are structured products that offer investors the upside opportunity to profit if commodity prices rise, combined with a downside guarantee that some, or potentially all (depending on the note’s terms), of the principal amount will be returned at the maturity of the structure.
Backwardation When the slope of the term structure of forward prices
is negative, the market is in backwardation, or is backwardated.
Contango
When the term structure of forward prices is upward sloping (i.e., when more distant forward contracts have higher prices than contracts that are nearby), the market is said to be in contango.
Normal backwardation
is when the forward price is believed to be below the expected spot price.
Normal contango
is when the forward price is believed to be above the expected spot price.
Roll yield or roll return
is the portion of the return of a futures position that results from the change in the contract’s basis through time.
Spot return
is the return on the underlying asset in the spot market.
Basis in a forward contract
is the difference between the spot (or cash) price of the referenced asset, S, and the price (F) of a forward contract with delivery T.
Market impact
is the degree of the short-term effect of trades on the sizes and levels of bid prices and offer prices.
Index products
take little or no active risk, extract no added value, and are not expected to generate active return.
The main benefits of commodities as an asset class
1) equity-like returns with comparable risk,
2) inflation protection
3) low correlation to traditional investments.
assets that show a positive correlation to inflation / have a positive inflation risk exposure
real assets and commodity futures including
timberland, farmland, real estate, inflation bonds, and commodity futures.
reason commodities serve as a good inflation hedging tool
commodities comprise a significant portion of the goods and services that are factored into the calculation of inflation indices. As can be seen in the composition of the U.S. Consumer Price Index, commodities directly contribute 22% to the index value, while other goods and services contribute 33%, housing: 33%, and medical and education: 10%. It is important to keep in mind that commodities that serve as production inputs also indirectly factor into the value of the other three categories of goods and services comprising the U.S. Consumer Price Index.