CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd Edition

PART Four

Commodity

Part Four of this book explores investing in commodities with an emphasis on investing in commodities through futures contracts. Forward contracts and futures contracts are very similar derivative contracts. These derivatives are central to investing in alternative investing and, in particular, in commodities. Chapter 18 focuses on the important principles of pricing futures and forward contracts. More specifically, Chapter 18 details the relationship between futures prices and cash (spot) prices. If the current market price of a commodity is $100, what can we say about the price of a futures contract that provides delivery of the same commodity in, say, three months? The concepts detailed in Chapter 18 are fundamental concepts to many topics within alternative investments that use futures or forward contracts, including managed futures funds and structured products.

Chapter 19 discusses methods of exposure to commodities as an asset class. Although commodity exposure is often obtained with futures and forward contracts, other methods of obtaining commodity exposure are discussed. Chapter 19 concludes with an analysis of historical evidence on commodity returns and risks.