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CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd Edition by Hossein Kazemi, Keith H. Black, Donald R. Chambers, Mark J. P. Anson, CAIA Association

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CHAPTER 18

Commodity Futures Pricing

Futures and forward contracts are the primary vehicle with which investors obtain exposure to commodity returns in alternative investments. The primary purpose of this chapter is to provide a detailed foundation to the pricing of futures and forward contracts relative to underlying spot prices.

18.1 FORWARD AND FUTURES CONTRACTS

A forward or futures contract in its simplest form is a binding agreement for the purchase or sale of a commodity but with deferred exchange of the commodity and the cash. Thus, if a person purchases gold today, taking immediate possession of the gold and immediately delivering the cash for the transaction, the exchange is said to have taken place in the spot market or cash market and presumably would have been executed at the spot price or cash price.

A forward contract or a futures contract obligates the seller of the futures contract (the short position) to deliver the underlying asset at a set price and at a specified time (the settlement date). Conversely, the buyer of a forward or futures contract (the long position) agrees to purchase the underlying asset at the set price and at a specified time. There are three general types of futures contracts regulated by the Commodity Futures Trading Commission (CFTC): financial futures, currency futures, and commodity futures. The CFTC and the SEC now share regulatory responsibility for over-the-counter (OTC) derivatives markets in the United States.

18.1.1 Differences ...

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