Introduction to Commodities and Commodity Derivatives (2025 Level II CFA® Exam – Alternative –LM 1)
In this CFA Level II reading on Commodities and Commodity Derivatives, learn how these instruments work as part of Alternative Investments. We cover key learning outcome statements (LOS), including:
Characteristics and life cycles of commodity sectors
Comparing the valuation of commodities vs equities and bonds
Relationship between spot and futures prices in contango and backwardation
Theories of futures returns
Components of total return for collateralized futures
How commodity swaps work to manage exposure
How index construction affects commodity index returns
By the end, you’ll understand how commodities provide diversification benefits, how futures markets operate, and why investors use swaps and indices to gain exposure.
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Topic 8 – Alternative Investments
Module 5 – Introduction to Commodities and Commodity Derivatives
0:00 Introduction and Learning Outcome Statements
0:21 LOS: Compare characteristics of commodity sectors.
5:41 LOS: Compare the life cycle of commodity sectors from production through trading or consumption.
9:29 LOS: Contrast the valuation of commodities with the valuation of equities and bonds.
12:42 LOS: Describe types of participants in commodity futures markets.
18:45 LOS: Analyze the relationship between spot prices and futures prices in markets in contango and markets in backwardation.
24:20 LOS: Compare theories of commodity futures returns.
32:00 LOS: Describe, calculate and interpret the components of total return for a fully collateralized commodity futures contract.
35:46 LOS: Contrast roll return in markets in contango and markets in backwardation.
36:21 LOS: Describe how commodity swaps are used to obtain or modify exposure to commodities.
44:59 LOS: Describe how the construction of commodity indexes affects index returns.
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