term1 Definition1term2 Definition2term3 Definition3
Please sign in to your Google account to access your documents:
Components of Return in Commodity Futures
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
Theories for price trends
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
Contango vs Backwardation
Contango = holding cost > benefit; roll yield (-); convenience yield down; low storage cost
Backwardation = holding cost < benefit; roll yield (+); convenience yield up; high storage cost
Currency Futures
Ft = S0 x [(1 + RDC)^T] / [(1 + RFC)^T
Ft = S0 x e^[(Rd - Rf) x T]
Need help typing ? See our FAQ (opens in new window)
Please sign in to create this set. We'll bring you back here when you are done.
Discard Changes Sign in
Please sign in to add to folders.
Sign in
Don't have an account? Sign Up »
You have created 2 folders. Please upgrade to Cram Premium to create hundreds of folders!