Reading 49: Investing in Commodities- LOS b～ Q1-4

positive, position, manager, likely, future

LOS b: Discuss how “roll yield” in a commodity future position can be positive (negative).

Q1. The portfolio manager of a passively managed commodity futures index fund establishes a collateralized position in soybean futures. The manager would most likely realize:

A) A positive roll yield in a contango market

B) A positive roll yield in a backwardated market.

C) A positive roll yield only in either a contango or backwardated market.

Q2. For commodity futures in a contango market, what is the most appropriate investment in futures for an investor who expects spot prices to remain constant, and how would the futures price change as the contract approaches maturity, respectively:

Investor’s position Change in futures price

A) long futures appreciate

B) short futures depreciate

C) short futures appreciate

Q3. DCL Hedge Funds (“DCL”) establishes a collateralized futures position consisting of a 120-day T-bill and 30-day natural gas futures. Assuming there is no change in the natural gas spot price over time, and assuming the market is in backwardation, which of the following statements is the most accurate description of the roll yield and DCL’s cash flow:

A) negative roll yield and positive cash flow.

B) positive roll yield and positive cash flow.

C) negative roll yield and negative cash flow.

Q4. Sandrine Graffe is the portfolio manager of a successful collateralized commodities futures fund in France. In a discussion with one of her newly hired associates, Graffe makes the following statements about collateralized futures:
Statement 1: A collateralized futures position refers to investing in short-term futures contracts with an equal investment in a risk-free asset, such as a Treasury bill. The futures must be continuously reinvested to match the maturity of the risk-free asset.
Statement 2: In a collateralized investment, investors realize return through the return on the risk-free investment and the gain or loss of the futures positions over time.
Statement 3: Fortunately, the increasing number of pension and hedge funds taking speculative long positions in commodity futures contribute to increasing roll yields and increasing gains on the continuously reinvested futures positions.
The least accurate statement made by Graffe is:

A) Statement 1.

B) Statement 2.

C) Statement 3.