Commodity Futures

Question 1

Physical Assets

Answer 1

(1) Physical assets are direct investment in tangible assets; (2) Typically included are investments in real estate, food, fiber, metals, agricultural products, etc.

Question 2

Financial Assets

Answer 2

(1) Indirect, paper investments in businesses, (2) Represented by a proportional ownership interest in either (3) the equity or debt of the underlying business.

Question 3

Futures Contract

Answer 3

(1) A contract that provides for the future exchange of an asset in the future (2) at a specified delivery date (3) for a specified payment amount.

Question 4

Spot Price

Answer 4

Current price of an asset in the cash market if you were buying a commodity right now “on the spot.”

Question 5

Future Price

Answer 5

Price of a contract for future delivery

Question 6

Long Position

Answer 6

When an investor purchases a contract for future delivery

Question 7

Short Position

Answer 7

When an investor sells a contract for future delivery

Question 8

Speculator

Answer 8

(1) One who speculates in the futures market to earn profits; (2) speculators rarely take delivery of assets

Question 9

Hedger

Answer 9

(1) One who is not trying to speculate, but rather (2) hedge to reduce or completely offset their risk exposure to an underlying asset.

Question 10

Daily Price Limit

Answer 10

The maximum price a futures contract may go up or down relative to the settlement price of the previous day.

Question 11

Open Interest

Answer 11

(1) The number of futures contracts in existence on any given day. (2) A new buyer and seller would increase open interest, whereas (3) a buyer an seller closing out their position would decrease open interest

Question 12

Marked-to-Market

Answer 12

A settlement process whereby any increase or decrease in account equity is adjusted for daily changes in the price of the underlying asset.

Question 13

Major Sources of Risk in Commodities

Answer 13

The major sources of risk are (1) business and (2) financial risk.

Question 14

Commodity benefits on Portfolio Construction

Answer 14

(1) Commodities have low positive, or negative correlations with stocks and bonds. (2) Adding Stock reduces portfolio standard deviation. (3) Commodities typically have high correlation with inflation.

Question 15

Nonspeculative Commodity Portfolio

Answer 15

(1) The portfolio should be long only, with no short positions; (2) it should be broadly diversified; (3) and it should not use leverage.

Question 16

Commodities Benchmark limiting the concentration of Energy

Answer 16

(1) The DJ-AID index specifies a maximum of 33% invested in a single index; (2) This helps reduce the percentage of energy concentration that is typical in other indexes

Question 17

Emerging Economics

Answer 17

(1) Many investors and economists believe that the emerging economies may be the growth engine for the 21st century world. (2) If correct, these economies will need massive amounts of commodities to build out their infrastructures, which will increase demand and prices.