Valuation of Commodities in Contrast to Equities and Bonds

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. Equities and bonds are intangible.

Return on Investment

Commodities are intrinsic with variable economic value. They also don’t generate future cash flows since they trade in derivative contracts with finite lifetimes, e.g., future contracts. Equities and bonds have a claim on the economic output of a firm,i.e., profits. They also generate future cash flow.

Price Determinants

For commodities, the forward price and future contracts are affected by demand and supply, ongoing expenditures, e.g., transportation and storage costs. Equities and bonds receive periodic income hence they are not affected by ongoing expenditures, e.g., storage and transportation costs.

Terms of Delivery

Some commodity contracts require actual delivery of the physical commodity. Equity and bonds are settled through cash payments.

Arbitrage Process

It is difficult to arbitrage commodity prices since some participants cannot make or take delivery of the physical commodity. It is easy to arbitrage equity and bond prices.


Which of the following is most likely a key difference between the valuation of commodities and valuation of stocks and bonds?

  1. Valuation of stocks and bonds focuses on future supply and demand, whereas commodity valuation focuses on future profit margins and cash flow.
  2. The valuation of commodities focuses on supply and demand, whereas the valuation of stocks and bonds focuses on discounted cash flows.
  3. Valuation of commodities cannot be conducted using technical analysis.


The correct answer is B.

Valuation of commodities is based on a forecast of future prices based on supply and demand factors and expected price volatility. In contrast, valuation of stocks and bonds is based on estimating future profitability and cash flow.

A is incorrect. Choice B provides a stuck contrast to this position.

C is incorrect. Technical analysis is sometimes applied to valuing commodities.

Reading 39: Introduction to Commodities and Commodity Derivatives

LOS 39 (c) Contrast the valuation of commodities with the valuation of equities and bonds.


Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop MBA Admission Exam Prep

    Daniel Glyn
    Daniel Glyn
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.
    Nyka Smith
    Nyka Smith
    Every concept is very well explained by Nilay Arun. kudos to you man!
    Badr Moubile
    Badr Moubile
    Very helpfull!
    Agustin Olcese
    Agustin Olcese
    Excellent explantions, very clear!
    Jaak Jay
    Jaak Jay
    Awesome content, kudos to Prof.James Frojan
    sindhushree reddy
    sindhushree reddy
    Crisp and short ppt of Frm chapters and great explanation with examples.