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What You’ll Learn:
1. Commodity Futures Basics:
• Understand what a futures contract is and the obligations of the long and short positions.
• Learn the difference between the spot price, futures price, basis, and calendar spread.
2. Market Conditions:
• Explore the concepts of contango and backwardation, and how they affect futures pricing.
3. Theories Explaining Futures Pricing:
• Insurance Theory: Understand why futures prices might be lower than spot prices due to producers seeking to hedge against price uncertainty.
• Hedging Pressure Hypothesis: Learn how the hedging behaviors of both producers and users of commodities influence market conditions.
• Theory of Storage: Discover how storage costs and convenience yield impact futures prices, leading to contango or backwardation.
4. Practical Applications:
• Analyze the factors that drive futures markets into contango or backwardation and the implications for investors and traders.
By the end of this lecture, you’ll have a comprehensive understanding of how commodity futures are priced, preparing you for your CFA Level II exams and enhancing your expertise in financial markets.
