ALTERNATIVE INVESTMENTS

Investing commodities

1. 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.

2. Which of the following best defines a contango commodities market?

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

B) The futures price is below the expected future spot price.
C) The futures price is below the current spot price.

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

B) A downward sloping curve, reflective of contango markets.
C) An upward sloping curve, reflective of backwardated markets.

4. If a commodities market has a downward-sloping term structure of futures prices, this

would be associated with:

A) normal backwardation and a negative roll return.

B) normal backwardation and a positive roll return.
C) contango and a positive roll return.
5. 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) roll yield.
B) collateral yield.
C) current yield.

6. 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.

7. 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.

8. 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) Market is dominated by long hedgers.
C) Futures prices are lower than spot prices.

9. Which of the following most accurately describes a reason why a commodity index
strategy should be considered an active strategy?

A) Managers choose benchmark index.

B) High turnover of contracts held.
C) Index rebalancing due to changing inflation.

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

By policy, always rolling expiring 180-day T-Bills posted as collateral into new 180-
A)
day T-Bills.
B) Duplicating the component rebalancing scheduling of the benchmark.
C) Rolling futures contracts over two days before the benchmark’s rollover date.

1B 2A 3A 4B 5B 6B 7A 8C 9B 10C