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IBBC CAPITAL ACADEMY / 2027

Disentangle commodity spot moves and roll effects

Independent IBBC Capital draft content for self-study. Not affiliated with or endorsed by CFA Institute. New lessons await subject-matter review. No CFA designation or official PSM credit is awarded.

Learning goals

  • Calculate the one-year commodity carry price.
  • Explain why lowers the model futures price applies to this case.
  • Identify the case-specific assumption or failure mode before taking action.

Draft · approximately 30 minutes, excluding further revision.

Shared case and decision context

Spot commodity price is 80. Annual continuously compounded financing and storage rates are 4% and 2%; convenience yield is 1%. A one-year cost-of-carry illustration is used. An investor rolls from a near contract priced 82 into a farther one priced 85.

Economic or professional mechanism

Physical ownership provides inventory services and incurs storage and financing costs. The convenience yield captures benefits of availability rather than an ordinary cash dividend. Futures returns need not equal spot returns because collateral income, term-structure changes and rolling positions matter. Contango and backwardation describe curve shape, not certain forecasts.

Apply, challenge and communicate

The stated carry price is approximately 84.10. Buying the more expensive deferred contract is consistent with an upward-sloping curve and can create a headwind if prices converge unfavorably, but an actual realized roll return depends on subsequent prices and the precise strategy. Check units, quality, location and deliverability before claiming an arbitrage.

Commodity economics, participants and index design

Energy moves through extraction, transport, storage, refining and consumption, with capacity bottlenecks and seasonality; agricultural supply depends on planting cycles, weather and perishability; metals depend on mining, processing and industrial demand. A commodity has no shareholder distribution, so a corporate dividend model does not directly price the physical good. Inventory, carrying costs and convenience of immediate availability help connect spot and futures when arbitrage is feasible.

Producers may sell futures to stabilize revenue, consumers buy to stabilize input cost, and speculators supply or demand risk-bearing capacity. Hedging pressure can support a risk premium; storage and inventory theories emphasize convenience yield; an expectations account interprets futures relative to expected spot. None implies every contango investment loses or every backwardated investment profits: spot movement, collateral income and roll effects jointly determine return.

A commodity swap can exchange a fixed price for a floating index over specified volumes and dates, reducing or creating price exposure while adding basis, collateral and counterparty risk. A production-weighted energy-heavy index reacts differently from an equal-weighted diversified index. Eligible contracts, roll schedules, maturity, rebalancing and collateral convention change investable returns even with the same commodity names.

Formula and assumptions

F=S*exp((r+storage−convenience yield)*T)

Case analysis with explicit assumptions

  1. Spot commodity price is 80. Annual continuously compounded financing and storage rates are 4% and 2%; convenience yield is 1%. A one-year cost-of-carry illustration is used. An investor rolls from a near contract priced 82 into a farther one priced 85.
  2. Method: F=S*exp((r+storage−convenience yield)*T)
  3. Case result: 84.10. The stated carry price is approximately 84.10. Buying the more expensive deferred contract is consistent with an upward-sloping curve and can create a headwind if prices converge unfavorably, but an actual realized roll return depends on subsequent prices and the precise strategy. Check units, quality, location and deliverability before claiming an arbitrage.

Errors to catch

  • Do not replace the stated assumptions with an unstated shortcut. Reconcile units, timing and the claim being valued or duty being assessed.
  • The absence of any contract expiry is not a defensible conclusion for these case facts.

Original knowledge check

Answer every question before checking. Review explanations after submitting; retry starts a new attempt.

Sources and coverage status

These original lessons are drafts. Public outlines are used to check scope; the official learning-outcome text and proprietary question banks are not reproduced here. Follow the source for exam-year requirements and updates.