mouse123

All of the following are examples of commodity-linked equities EXCEPT:

A) a gold mining company.

B) an oil and gas exploration company.

C) a supermarket operating company.

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The stocks of a gold mining company and an oil and gas exploration company are highly correlated with commodities prices, because their values are closely linked to the price of the commodities they produce. A supermarket chain will be more diversified, and many other factors will contribute to the value of the company.

mouse123

Commodity-linked securities may be appropriate for investors:

A) seeking speculative profits in the commodities market.

B) seeking investments that are negatively correlated with inflation.

C) prohibited from owning physical assets.

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Commodity-linked securities are not derivatives, though their performance is linked to some commodity price. Commodity-linked securities are positively correlated with inflation. Commodity-linked securities are an appropriate investment for those who are prohibited from directly owning real assets such as commodities, but wish to participate in the market.

mouse123

While discussing the role of commodities as a vehicle for investment, a commentator makes the following statements:
Statement 1: During economic expansions, increasing supply tends to reduce the price of commodities.
Statement 2: Investing in commodities can give the investor exposure to fluctuations in production and consumption.
Are these two statements CORRECT?

Statement 1

Statement 2

A) Correct Correct

B) Incorrect Correct

C) Incorrect Incorrect

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Statement 1 is incorrect. During expansions, increasing demand for finished goods causes an increase in demand for the commodities needed to produce them, resulting in higher prices for commodities. Statement 2 is correct. Commodities can give an investor exposure to the economy’s production and consumption growth, with swings in commodity prices likely to be larger than changes in finished goods prices.

mouse123

Money managers and individual investors can indirectly participate in the commodities market through all of the following investment vehicles EXCEPT:

A) futures contracts.

B) trading commodities in small denominations.

C) stocks of companies producing a commodity.

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Trading the commodities themselves is direct participation. Investors can participate indirectly though futures contracts or certain commodity-linked equities.

mouse123

The total return on a collateralized commodity futures position is equal to the return on a:

A) short futures position plus the interest income earned on Treasury bills.

B) long futures position plus the interest income earned on Treasury bills minus the increase in spot prices of the commodity.

C) long futures position plus the interest earned on Treasury bills.

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The total return on collateralized commodity futures is the sum of the increase in the futures price and the interest on the T-bills used to collateralize the futures position.

mouse123

A portfolio manager takes a long position in commodities futures for a set amount of underlying value, and then simultaneously invests the same amount in government securities. This strategy is called a:

A) margin position.

B) collateralized futures position.

C) total-return strategy.

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A margin position in the commodities market involves buying or selling commodities futures by posing margin. The term “total-return strategy” could apply to any number of investment strategies that seek income plus capital appreciation. A collateralized futures position involves the simultaneous investment in futures and in government securities with a value equal to that of the futures position. The investor realizes a return equal to the change in price of the futures plus the return on the government securities.

mouse123

An analyst discussing collateralized commodity futures states the following:
Statement 1: The sources of return on a collateralized commodity futures position are changes in the futures contract price and the interest earned on the government securities held.
Statement 2: To establish a collateralized commodity futures position, an investor purchases a futures contract and an amount of government securities equal to the current market value of the futures position.
Are these statements CORRECT?

Statement 1

Statement 2

A) Correct Incorrect

B) Incorrect Correct

C) Correct Correct

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Statement 1 is correct. The total return on a collateralized commodity futures strategy is the return from the futures position plus the interest from the government securities. Statement 2 is incorrect. The amount of government securities to purchase is equal to the futures contract value, the futures price per unit times the number of units covered by the futures contract. Remember that the market value of the futures position is zero at contract initiation.

mouse123

The total return on a collateralized futures position is composed of the change in:

A) futures price plus the interest income on the futures.

B) Treasuries price plus the interest income on the futures.

C) futures price plus the interest income on the Treasuries.

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The total return on the position equals the gain or loss on the futures position plus the interest earned on the Treasury position.

mouse123

A commodities investor establishes a $10 million collateralized futures position. If the futures are worth $10.5 million three months later, and Treasuries have an annualized return 4.75% during the period, the total gain on the position is:

A) $975,000.

B) $618,750.

C) $500,000.

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The total return on the position equals the gain on the futures position plus the return on the Treasury bills: $500,000 + ($10,000,000 × 4.75% × (90 / 360)) = $618,750.

mouse123

Which of the following statements regarding exchange traded funds (ETFs) is NOT correct?

A) ETF investors own shares of the underlying investment company.

B) ETFs are funds that can be traded in a stock market.

C) ETF shares can be sold short or margined.

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ETF shares trades in the stock market just like traditional equities, and can be sold short or margined. ETF investors own shares of the underlying investment portfolio, not of the company.