Francois Pienaar is a portfolio manager at Springbok Commodities (SC), a commodity-based hedge fund located in the United States. SC’s strategy uses a fixed-weighting scheme to allocate exposure among 12 commodities, and it is benchmarked against the Thomson/Reuters/CoreCommodity CRB Index (TR/CC CRB). Pienaar manages the energy and livestock sectors with the help of Siya Kholisi, a junior analyst. Pienaar and Kholisi meet to discuss a variety of factors that affect commodity values in the two sectors they manage. Pienaar tells Kholisi the following: Statement 1: Storage costs are negatively related to futures prices. Statement 2: In contrast to stocks and bonds, most commodity investments are made by using derivatives. Statement 3: Commodities generate future cash flows beyond what can be realized through their purchase and sale. Statement 4: Roll returns are generally negative when a futures market is in contango. Statement 5: Roll returns are generally positive when a futures market is in backwardation. Which of Pienaar’s statements regarding the valuation and storage of commodities is correct? Justify your answer with a single sentence.
Francois Pienaar is a
Pienaar and Kholisi meet to discuss a variety of factors that affect commodity values in the two sectors they manage. Pienaar tells Kholisi the following:
Statement 1: Storage costs are negatively related to futures prices.
Statement 2: In contrast to stocks and bonds, most commodity investments are made by using derivatives.
Statement 3: Commodities generate future cash flows beyond what can be realized through their purchase and sale.
Statement 4: Roll returns are generally negative when a futures market is in contango.
Statement 5: Roll returns are generally positive when a futures market is in backwardation.
Which of Pienaar’s statements regarding the valuation and storage of commodities is correct? Justify your answer with a single sentence.
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