From CFAI text: “In contrast, indirect investment in commodities involves the acquisition of claims on commodities, such as in futures markets” -p113, so it derivatives investment is considered “indirect” From Schweser Notes: Direct investment is either through actual purchase of physical commodity or the purchase of derivatives on those assets. Indirect investment is usually done through investment in companies whose principal business is associated with commodity. -so derivatives investment is considered “direct” Is Schweser wrong on the definition or am I missing something here? -thx
I think the summary on p113 is inaccurate. On p 47 of the CFAI text it states: “Direct commodity investment entails cash market purchase of physical commodities 0 agricultural products, metals, and crude oil - or exposure to changes in spot market values via derivatives such as futures.” “Indirect commodity investment involves the acquisition of indirect claims on commodities, such as equity in companies specializing in commodity production.” …which is agreement with Schweser (and all the questions on direct vs. indirect that I’ve come across).
Agree with McLeod.
Direct means you get returns that are based almost exclusively on changes in the commodity price. Indirect things like commodity company equity are affected by the commodity price, but are also affected by things like how the equity market in general performs. So if you buy a gold mining company, you could lose money even if gold prices rise, simply because the equity market as a whole is tanking. That’s why it’s indirect. So physical commodities are direct, as are futures on commodities.
bchadwick, I wanted to thank you for taking the time to help us candidates in the home stretch.
I check this out last week with CFAI. They seemed to confirm that the definition on page 113 of indirect commodity investment was incorrect. The lady’s response was a little inconsistent with my original question so I’ll seek some clarification and post their response. They mentioned something about correcting it when the curriculum is reprinted, I’m not sure if that includes updating the Errata for this year. In any event it looks like Schweser was actually correct in this instance.
Yes lets start the thank you bchadwick thread