Commodities

This chapter examines the features of commodities as an asset class. Therefore, the focus is on the futures markets and their distinctive characteristics. In particular, the calculation of the convenience yield of holding physical commodities is basilar in defining the price of commodities and the shape of the term structure: the chapter assesses the impact of the opposing forces of supply and demand and provides an in-depth analysis of the Theory of Storage. Given that financial investments in commodities are mainly affected by trends in futures prices rather than spot prices, the chapter examines in detail the components of the returns of commodity futures. The inclusion of commodities in a financial assets portfolio requires a careful selection of the representative benchmark, given the different types of return followed by the index and the weighting techniques used, and of the investment vehicles, which are object of examination: shares of companies operating in the commodity sector, commodity derivatives, and commodity Exchange-Traded Products (ETP).