Commodity Swaps and Exposure to Commodities
A commodity swap is a legal contract involving the exchange of payments over several dates as determined by specified reference prices or indexes relating to commodities. Swaps are an alternative to futures when investors want to gain market exposure or…
Roll Returns in Markets in Contango and Backwardation
Roll return is the amount of return generated in the futures market after an investor rolls a short-term contract into a longer-term contract and profits from merging the futures price toward a higher spot or cash price. When a market…
Components of Total Return for a Fully Collateralized Commodity Futures Contract
The total return on commodity futures is analyzed into the following key components: The price return (or spot yield). The roll return (or roll yield). The collateral return (or collateral yield). The Price Return This refers to the change in…
Theories of Commodity Future Returns
Insurance Theory The theory proposes that producers use commodity futures markets for insurance by locking in prices and making their revenues more predictable. It is also known as the theory of “normal backwardation” and has been proposed by economist John…
Spot and Future Price Comparisons in Contango and Backwadation Markets
Commodity prices are generally represented by: Spot price: Refers to the current price at which a physical commodity can be delivered to a specific location. It is, otherwise, the cost at which a physical commodity can be purchased and transported…
Participants in Commodity Future Markets
Public commodity markets are controlled as a central exchange where members trade standardized contracts to make and take delivery at a specified place at a specified future timeframe (futures markets). Commodity Hedgers They’re knowledgeable market participants, though they may not…
Valuation of Commodities in Contrast to Equities and Bonds
We can use the following modes of valuation to compare commodities and equities. Nature of Asset Commodities are mostly physical or tangible assets, e.g., a lump of gold, a pile of corn, etc., except for some energy commodities, e.g., electricity….
Commodity Life Cycles
The life cycle of commodities differs significantly depending on the economic, technical, and structural (i.e., industry, value chain) profile of each commodity and the sector. The commodity life cycle has an impact on the following aspects: It reflects and magnifies…
Characteristics of Commodity Sectors
The recommended approach for segmenting the various asset classes is by Thomson Reuters/Core Commodity CRB Index developed by the well-recognized Commodities Research Bureau as follows: Energy Crude Oil Crude oil (or petroleum) is a flammable fluid produced by huge quantities…
Calculation of Management Fees, Carried Interest, NAV, DPI, RVPI, and TVPI
Example: Calculating Management Fees, Carried Interest, NAV, DPI, RVPI, and TVPI Calculation Consider the following information: Management fee: 2% Carried interest: 20% Committed capital: 200 The first total return method is applied. All amounts are given in $ millions. Calculate:…
