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Commodity - Coggle Diagram
Commodity
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Commodity swaps
Commodity swap is a legal contract involving the exchange of payments over multiple dates as determined by specified reference prices or indexes relating to commodities.
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Excess return
swap
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An oil refiner wants to hedge its oil purchases over an extended period. → Entering long position in a swap contract
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Variance swaps
Proportional difference between an observed/actual variance in the price levels of a commodity and a fixed amount of variance
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Theories of returns
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Insurance theory
Producers use commodity futures markets for insurance by locking in prices and thus make their revenues more predictable-> Backwardation market
Total return
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Collateral return
Yield for bonds/cash used to maintain the futures position. Collateral acts as insurance for the exchange that the investor can pay for losses.
When calculating expected return, most indices will use short-term Treasury bills.
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