Alternative Investments【Reading 67】Sample 2012, breakfast, suppose, companies

mouse123

In the futures market for a variety of wheat, suppose breakfast cereal companies are the dominant market participant. What will be the most likely shape of the futures price curve?

A) A downward sloping curve, reflective of contango markets.

B) An upward sloping curve, reflective of contango markets.

C) An upward sloping curve, reflective of backwardated markets.

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The dominant traders in the market are long hedgers (i.e., users of the commodity) since they purchase wheat for cereal production. Thus, they will go long futures contracts to hedge price exposure. To induce speculators to take the other side of the futures contract, they must pay a premium for the hedging benefit received. As a result, the futures price curve will be upward sloping, which would be classified as a contango market.

mouse123

Which of the following best defines a contango commodities market?

A) The futures price is below the expected future spot price.

B) The futures price is below the current spot price.

C) The futures price is above the current spot price.

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A contango commodities market occurs when the futures price is above the current spot price.

mouse123

Which of the following best defines a backwardated commodities market?

A) The futures price is below the expected future spot price.

B) The futures price is below the current spot price.

C) The futures price is above the current spot price.

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A backwardated commodities market occurs when the futures price is below the current spot price.

mouse123

Which of the following market conditions most accurately describes the conditions of a particular commodity market for the roll yield to be positive?

A) Contango.

B) Futures prices are lower than spot prices.

C) Market is dominated by long hedgers.

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A positive roll yield results from a backwardated market, whereas a negative yield is produced in a contango market. In backwardated (contango) markets, futures prices are lower (higher) than spot prices. Futures markets that are dominated by long (short) hedgers tend to be in contango (backwardation).

mouse123

Which of the following best describes why adding a commodities index position to a portfolio of stocks and bonds may be beneficial? Commodities index positions:

A) serve as a hedge against inflation.

B) are positively correlated with stock and bond prices.

C) benefit from commodity markets oscillating between contango and backwardation.

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The correlation between commodity futures and inflation is positive, while the correlation between inflation and stocks and bonds is negative. Therefore, declining stock and bond prices due to high inflation can be offset by the rising prices of commodities that occur during times of high inflation. While it is possible for commodity futures markets to change between backwardation and contango, this alone is not a reason to add a commodities position to a traditional portfolio.

mouse123

Which of the following will result from the term structure of futures prices for a particular commodity being in contango?

A) Negative collateral yield.

B) Negative roll yield.

C) Positive current yield.

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A positive roll yield results from a backwardated market, whereas a negative yield is produced in a contango market. In backwardated (contango) markets, futures prices are lower (higher) than spot prices.

mouse123

The component of the return on a futures position that results from interest earned on U.S. Treasury bills deposited to establish the position is called the:

A) collateral yield.

B) roll yield.

C) current yield.

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Collateral yield is the return earned on the collateral posted to satisfy margin requirements. In most cases, the collateral posted will be U.S. Treasury Bills, in which case the collateral yield is the T-bill yield.

mouse123

If a commodities market has a downward-sloping term structure of futures prices, this would be associated with:

A) normal backwardation and a positive roll return.

B) normal backwardation and a negative roll return.

C) contango and a positive roll return.

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Normal backwardation, when it exists, produces a downward-sloping term structure of futures prices. Such a condition predicts a positive roll return. If the term structure is positive, which is a result of contango, the roll return would be negative.

mouse123

The active management that is required to maintain a long-only commodity index strategy is least likely to affect the:

A) price return.

B) roll yield.

C) collateral yield.

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To maintain long exposure to an index of commodity prices, the manager must periodically roll over expiring futures contracts. The manager must also manage the short-term debt posted as collateral, replacing bills as they mature. The manager can enhance the strategy’s roll yield and collateral yield by carrying out these transactions in ways that minimize costs and take best advantage of market conditions. Price return on the index strategy depends on the direction of prices of the commodities in the index.

mouse123

Which of the following activities by a manager using a commodity index strategy is most likely to be classified as active management?

A) Rolling futures contracts over two days before the benchmark’s rollover date.

B) By policy, always rolling expiring 180-day T-Bills posted as collateral into new 180-day T-Bills.

C) Duplicating the component rebalancing scheduling of the benchmark.

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Rolling over futures contracts prior to the index rolling them over would be an example of active management. Managers who roll over contracts early attempt to enhance returns by avoiding the higher rolling costs present when attempting to roll over at the same time as the benchmark. Duplicating the rebalancing schedule of the benchmark and using a fixed rule to roll over posted collateral do not represent value-adding activities by the manager.