CFA Level I · CFA Level I Exam · Natural Resources
Which of the following is the most likely reason an investor uses commodity futures rather than physical holdings to gain exposure to crude oil?
Investors most likely use futures because they avoid the costs and logistics of storing and transporting physical crude oil while still gaining price exposure. Futures still carry price risk, and the roll return can be positive or negative depending on whether the curve is backwardated or in contango.
- AFutures eliminate all price risk from the position
- BFutures avoid the costs of physical storage and transportCorrect
- CFutures guarantee a positive roll return
Explanation
Futures provide price exposure without taking delivery, so the investor avoids storage, insurance and transport of the physical commodity. Futures do not remove price risk, and roll return can be negative or positive depending on the curve shape.
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