CAIA Association’s 10 Lessons in Finance 2022 - Lesson 2: Investment and Risk Management Using Commodities

November 01, 2022

This webinar focused on commodities with an eye on risk management and financial gain. The coverage was as follows:

1. Commodity derivatives have 2 roles – first – used as a tool of risk management (hedging) for mitigating the price risk. This is generally done by commodity producers/ consumers; second – is investment purpose – i.e. investors trade in commodities in anticipation of making profit from such investment;
2. In order to undertake hedging appropriately, it is important to understand the modalities and mechanism of hedge transactions.
3. Taxation and accounting rules are progressively being reformed to encourage commodity price hedging;
4. In recent times there is growing interest in commodity investing because of their unique characteristics like the ability to hedge inflation risk, insure against event risks, portfolio diversification etc. The entry of Mutual Funds in the commodity space is also taking commodity investment to retail investors.
5. Commodity investment is unique as exposure to commodities (generally) involves exposure to two asset classes: (i) Commodity and (ii) US dollar. Commodities offer a natural hedge against exchange rate risk of US dollar since they are traded in dollars. Hence, inclusion of commodities is an effective way of portfolio diversification of equity and bond portfolios.