Cfa Level 2 Alternative Investments

Front 1

Components of Return in Commodity Futures

Back 1

Total Return = spot + roll + collateral + rebalancing

1. Spot return = %ch in price driven by supply and demand

2. Roll return = when closing maturing futures contracts and replaced with new ones

3. Collateral return = interest on cash investment; reflect US T-bill rate

4. Rebalancing return = due to diversification; contracts that increase in value are sold and those that decreased are purchased; positive return if spot prices are volatile in short term and stable in long term

Front 2

Theories for price trends

Back 2

Hedging pressure = normal contango; farmers that wish to hedge against price risk outnumbered by consumers who hedge by taking long positions in futures markets

Insurance perspective = normal backwardation; farmers dominate hedge market

Theory of storage = relies on convenience yield to predict trend; normal contango if high inventory levels today

Front 3

Contango vs Backwardation

Back 3

Contango = holding cost > benefit; roll yield (-); convenience yield down; low storage cost

Backwardation = holding cost < benefit; roll yield (+); convenience yield up; high storage cost

Front 4

Currency Futures

Back 4

Ft = S0 x [(1 + RDC)^T] / [(1 + RFC)^T

Ft = S0 x e^[(Rd - Rf) x T]