CAF level 1 Alternative Investments - Commodities - 1

CFA Learning outcome statements

Commodities

p. discuss the role of commodities as a vehicle for investing in production and
consumption;

q. explain the motivation for investing in commodities, commodities derivatives,
and commodity-linked securities;

r. discuss the sources of return on a collateralized commodity futures position.



Commodities are raw materials that are sold in bulk, such as oil, wheat, silver, gold, oranges and cocoa. They are generally raw materials that are eventually used to produce other goods such as oil for gasoline, cocoa for chocolate, wheat for bread, etc. There is trade in commodities within a country as well as across countries. Most large manufacturers buy the commodities they need on the "spot market," where the full cash price is usually paid on the spot. Speculators typically buy and sell commodities with options and futures contracts.As such, they give an investor/speculator the opportunity to invest in the materials that a country produces and in the materials it consumes.