Learn about commodity derivatives for the exam. Understand futures contracts, contango and backwardation, roll yield, and hedging applications.
Commodity Derivatives Overview
Commodity derivatives are used extensively for hedging and speculation. Understanding their unique characteristics is important for the exam.
Commodity Futures Basics
Contract Specifications
- Standardized quantity and quality
- Delivery location and dates
- Tick size and contract value
- Margin requirements
Major Categories
- Energy: Crude oil, natural gas
- Metals: Gold, silver, copper
- Agriculture: Corn, wheat, soybeans
- Livestock: Cattle, hogs
Contango vs. Backwardation
Contango
- Futures price > Spot price
- Normal for storable commodities
- Reflects cost of carry (storage, financing)
- Negative roll yield for long positions
Backwardation
- Futures price < Spot price
- Occurs when immediate supply is tight
- High "convenience yield"
- Positive roll yield for long positions
Roll Yield
- Return from rolling futures contracts
- Positive in backwardation
- Negative in contango
- Significant component of commodity returns
Hedging Applications
Producer Hedges (Short)
- Lock in selling price
- Protect against price declines
- Example: Oil producer sells futures
Consumer Hedges (Long)
- Lock in purchase price
- Protect against price increases
- Example: Airline buys jet fuel futures
Basis Risk
- Difference between spot and futures
- Can change over time
- Hedge may not perfectly offset
- Location and quality differences
Key Exam Topics
- Contango vs. backwardation
- Roll yield calculation and impact
- Hedging strategies
- Basis risk
- Cost of carry model
Tags:commodity derivativesfuturescontango backwardation