collateral yield positively correlated to inflation?

This is from a question in the free sample exam. "The collateral yield, because it is positively correlated to inflation, can represent a substantial portion of total return on commodity futures investment. " This comment is correct according to the answer. Why is collateral yield correlated to inflation? It’s similar to risk-free rate or treasury-bill rate. It’s not inflation protected bonds or something like that.

t-bill rates/ risk free rate is linked to inflation - - wouldn’t think so now, but theoretically it is right?


Yes b/c the Collaterial Yield is the return from placing your margin in T-bills and T-bill Yields “should” increase with inflation…

Got it. Thank you.

Just did free sample exam and got this question wrong. Is it really a large contributor to total return??? I did not expect Rf rate to be a large contributor…

tanyusha, ofcourse it is. Check yearly yield on GSCI and Rfr

can someone explain this one to me just got it wrong on the free test

Rf rate increases as inflation increases and collateral yield is essentially Rf rate. Why it is substantial part of total commodity return refer to comp_sci_kid answer.

What’s the other yield? Roll, collateral and …?

I would have gotten it wrong myself, but I think the explanation is that T-bills include expected inflation because investors at auction will demand compensation for it. It’s baked in through the supply and demand process. Unexpected inflation is not baked into the price, and that’s where TIPS will help (not that mine have been doing well).

TheBigBean Wrote: ------------------------------------------------------- > What’s the other yield? Roll, collateral and …? Spot… But does the spot yield assume that RFR stays constant over the holding period? If the RFR goes up, the futures price will go up even if the spot rate stays the same at any time other than expiration. Or does the model assume that futures are rolled forward only on expiration day?

Can someone explain me that collateral yield is a “significant” part in commodity return? I dont have problem with inflation, but not so sure about significant.

Roll, collateral, spot

csk is right, just graph in your bloomberg gsci spot, total return and excess return, you will see (no idea about the tickers or the correct names, specially since s&p bought them to goldman)

Assuming that the collateral is 5% and that the spot price doesn’t change all that much, you’d expect it to be about 1/20th of the risk free rate. If RFR is 4%, that comes to about 20bps. For bond futures, 20bps could be significant. For commodities, given that in *normal* times the expected spot return is approximately 0, it’s better than nothing. In any case, if your account is large enough, 20bps could be enough change to employ your nephew or niece, or maybe even me!

i guess i was thinking of it in real terms as bonds are a bad inflation hedge and since the collateral yld comes from a nominal bond…

I think: Let’s suppose the spot price is 50, yield is 1 and the risk free return is 5 over a period. So, the simplified future’s price is 50 + 5 -1 = 54 If half a period later the spot price is 55. Then the future’s price will be 55 + 2.5 - 0.5 = 57 So then we have a roll yield of 0.5, spot yield of 5 and a collateral yield of 2.5. Agree?