commodities (swaps, and formulae)

CFA Level III
#1

please correct me if wrong, but there is not a single question (other than contango and backwardation) in this year sample exams + mock exam + previous years essay problems… and almost no on in the PM session of schweser exams vol1 and vol2, right? seems it is more likely to have questions about commodities from the LOS of alternative investments (with HFs, RE, PE, etc, in a portfolio context) than from convenience yields, lease rates and that bullsh*t thx

#2

just remmber if you are receive of commodities and IR goes up - you lose. Also Commodity Swap MV changes with time regardles of IR and Spot changes Price Commodity Swap is easy sum(PV(0,t)*Ft)/sum(PV(0,t))

#3

why would you loose if IR goes up. Ithought commodities are good for inflation hedge. IR goes up mostly due to infl pressure. so it should be good.

#4

in a swap you will lose, check end of chapter questions for swaps

#5

i guess he means regarding commodity swaps: you are paying “x” each month, and mkt value of this commodity swap = present value of each monthly “x”… if interest rates go up, that pv goes down, and you are long it… without commodity swaps, you are right: if int.rates are up because of inflation, good for commodities (not all). also, int.rates go up = higher price of commodities using the formula of spot x exp (RFR - convenience yield or lease rate or whatever), and also int.rates go up = higher collateral return (regardless of spot return and roll return)

#6

I posted on this before, if Rf goes up, you lose on prepaid commodity swap if Forward prices are falling (in Contango). Opposite is true in backwardation. Don’t get caught on this.

#7

I predict that there will be a question related to the return generated by the “roll” feature of commodities returns in a backwardation situation.

#8

TooOld4This Wrote: ------------------------------------------------------- > I posted on this before, if Rf goes up, you lose > on prepaid commodity swap if Forward prices are > falling (in Contango). Opposite is true in > backwardation. Don’t get caught on this. Can you elaborate or point to where i can read about this? thanks

#9

there are questions in both vol 1 and 2 (multiple choice).

#10

to4t, according to you, current mkt value of a commodity swap will have to be calculated comparing to a “new” commodity swap (taking into account higher or lower rates, and any change in the shape of the fwd curve)?

#11

TooOld: a little lost on this one. Do you mean: 1. If Rf goes up, you will lose on a prepaid comm swap (agreed) 2. You will also lose if comm are in contango when you bought the swap and then forward prices drop (?) and 3. you will lose if comm are in backwardation when you bought the swap and forward prices increase (?) i.e. 1. and 2/3 are seperate events, not necessarily related?

#12

I mean, mkt value = sum of PV of (each “X” - “FWD with the same tenor”)?

#13

Here’s what I’m saying… We all agree that Rf goes up, prepaid swap buyer loses. Check example in CFAI where forward prices are 20 and 21 and you end up paying 20.483 on the prepaid swap. The reason is, for that first payment you paid 20.483 when you could have paid 20. You “lent” (“lended?”) .483 to the counterparty at Rf. If Rf goes up, you’re bummed because you could have got a better rate on the loan. Now, flip the forward prices around. 21 and 20 this time. Now you are borrowing .517 when you paid 20.483 and should have paid 21. Now if Rf goes up, you’re dancing in the streets. To be honest, I’m not 100% sure of this but I threw the numbers in a spreadsheet and it seemed to confirm my thinking. I was actually hoping CSK could confirm.