Commodity

The exam loves to make you decompose the futures return and sign the roll yield. Given “futures price < spot” or “the curve is downward-sloping,” that is backwardation → positive roll yield; an upward-sloping curve is contango → negative roll yield. A second favorite hinges on pricing theory: under the insurance/normal-backwardation view, longs earn a risk premium because hedgers (producers) accept a discounted futures price to offload risk, while the theory of storage explains contango through high storage costs and a low convenience yield (abundant inventory). Watch the question asking which component dominates long-run — for a fully collateralized position, collateral (the risk-free rate) plus roll often outweighs spot appreciation.

The classic trap is conflating spot price changes with total return; commodities, unlike real estate (income via NOI) or infrastructure (contractual, often inflation-linked cash flows), throw off no cash flow, so income never enters. Don’t assume commodities are a reliable inflation hedge — they hedge unexpected inflation specifically. Hook: “Backwardation Builds, Contango Costs.”