Set out the kinds of participant found in commodity futures markets
The idea
Several groups meet in commodity futures markets. Hedgers are producers and consumers offsetting price risk in their physical business, such as a farmer selling futures or an airline buying them. Speculators accept that risk for an expected profit; the curriculum splits them into informed investors, who trade on superior views of supply and demand, and liquidity providers, who earn a small premium for absorbing hedgers' order flow. Arbitrageurs exploit gaps between physical and futures prices, often owning storage so they can buy the physical good and sell futures when carry is rich. Exchanges provide the venue and clearing, analysts supply research and regulators police conduct. The trap is labelling a participant by what kind of firm it is rather than by why it trades.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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- Contrast the features of the different commodity sectors
- Contrast how commodity sectors move through their life cycle, from production to trading or consumption
- Explain how valuing commodities differs from valuing equities and bonds
- Analyse how spot and futures prices relate when markets are in contango and when they are in backwardation
- Contrast theories explaining commodity futures returns
- Set out, work out and interpret each part of the total return on a fully collateralised commodity futures contract
- Contrast roll return when markets are in contango with roll return when they are in backwardation
- Explain how commodity swaps can be used to gain or adjust exposure to commodities
- Explain how the way a commodity index is built influences its returns