We continue our discussion of new Level II readings.
Within Alternative Investments, there is a new chapter on commodities, A Primer on Commodity Investing.
The reading begins with a list of market participants: hedgers, speculators, arbitrageurs … no surprises so far. It then breaks down commodities into the various sectors: energy, metals, livestock, and agriculture. Make sure you know your palladium from your platinum, your wheat from your corn, and your pork bellies from your live hogs!
The various assets are described in terms of storability and renewability, and five different methods are presented for investing in commodities, derivative-based investing being far more likely than owning the physical assets.
Overlapping with your Derivatives studies, pricing of commodity futures is discussed. Backwardation, normal backwardation and contango are defined, with futures pricing given in terms of costs and benefits of carry.
Finally, the return on collateralized commodity futures is broken down into various components.
This is not such a challenging reading, and it is our opinion that it is most likely to be examined in conjunction with other Alternatives chapters rather than as a standalone item set.