The Handbook of Commodity Investing

CHAPTER 2

The Pricing and Economics of Commodity Futures

Mark J. P. Anson, Ph.D., JD, CFA, CAIA, CPA

President and Executive Director of Investment Services

Nuveen Investments, Inc.

Capital assets such as stocks and bonds can be valued on the basis of the net present value of expected future cash flows. Expected cash flows and discount rates are a prime ingredient to determine the value of capital assets. Conversely, commodities do not provide a claim on an ongoing stream of revenue in the same fashion as stocks and bonds, with the exception of precious metals such as gold, silver, and platinum which can be lent out at a market lease rate. Consequently, they cannot be valued on the basis of net present value, and interest rates have only a small impact on their value.

Another distinction between capital assets and commodities is the global nature of commodity markets. Worldwide, commodities are denominated in U.S. dollars. Furthermore, the value of a particular commodity is dependent upon global supply and demand imbalances rather than regional imbalances. Thus, commodity prices are determined globally rather than regionally. This is very different from bond and equity markets, which mainly reflect the economic developments within their own countries and regions.

Finally, commodities do not conform to traditional asset pricing models such as the capital asset pricing model (CAPM). Under the CAPM, there are two components of risk: market or systematic risk and company specific or ...