- CFA Exams
- 2025 Level I
- Topic 8. Alternative Investments
- Learning Module 5. Natural Resources
- Subject 2. Risk and Returns of Natural Resources
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Subject 2. Risk and Returns of Natural Resources PDF Download
Commodity investment objectives:
- Potential for returns;
- Portfolio diversification.
- Inflation protection.
Commodity spot prices are determined by supply and demand. Supplies of commodities are determined by production and inventory levels. The supply levels cannot be adjusted quickly. Demand levels are influenced by global manufacturing dynamics and economic growth.
Weather is a unique and exogenous risk for farmland and timberland. Global international competition environment can also cause interruptions in crop prices.
Diversification Benefits
Commodities are effective inflation hedges. In fact, some commodity prices are included in inflation calculations.
Because of the low correlation between commodities returns and traditional asset classes' returns, commodities are effective in portfolio diversification.
For some investors, there are ESG considerations by including timberland and farmland in their portfolios, as timber and crops consume carbon as part of the plant life cycle.
Instruments
Commodity investment may involve investing in actual physical commodities or in producers of commodities. However, most investors do not want to get involved in storing commodities such as cattle or crude oil. Typically, such investments are made using commodity derivatives (futures or swaps), which can be traded on exchanges or OTC.
There are also other means of achieving commodity exposure: Exchange-traded products (ETPs), CTAs, and funds that specialize in specific commodity sectors.
Investment funds are primary investment vehicles for timber and farmland.
User Contributed Comments 4
User | Comment |
---|---|
RamaG | Contango: when futures prices are higher than the spot price. Backwardation: when futures prices are lower than the spot price. |
Murtadha | Contango, when the forward curve is upward sloping and spot prices are lower than future prices due to minimal or lack of convenience yield, which represents cost of carry i.e. storage costs. This can be verified by the roll yield. |
jagp | Contango: when futures price is higher that the EXPECTED future spot price. Same goes for normal backwardation |
Mheaton37 | @AnalystNotes - alternative* |
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