CAIA - CHAPTER 12 WITH COMPLETE SOLUTIONS

Inflation is the decline in the value of money relative to the value of a general bundle of goods and services Nominal Price refers to the stated price of an asset measured using the contemporaneous values of a currency. Real Price refers to the price of an asset that is adjusted for inflation through being expressed in the value of currency from a different time period. Inflation Risk is the dispersion in economic outcomes caused by uncertainty regarding the value of a currency Commodity-linked note (CLN) is an intermediate-term debt instrument whose value at maturity is a function of the value of an underlying commodity or basket of commodities. Basis Risk is the dispersion in economic returns associated with changes in the relationship between spot prices and futures prices Excess Return of a Future Contract The return generated exclusively from changes in futures prices. Fully collateralized position a position in which the cash necessary to settle the contract has been posted in the form of short-term riskless bonds. Spot Return the return on the underlying asset in the spot market. Collateral Yield the interest earned from the riskless bonds or other money market assets used to collateralize the futures contract. Roll Yield a futures position from the change in the contract's basis through time. Basis of a futures contract changes for what two reasons First as time passes, the time to settlement of the futures contract shortens, and the contract's price (and basis) rolls up or down. Second, as components of the cost of carry vary (interest rates, dividend yields, storage costs, or convenience yields), the basis will also vary, since the basis depends directly on the four components of cost of carry. Convergence at settlement is the process of the futures price nearing the spot price as settlement approaches, and the two prices matching each other at settlement. Heterogeneous in the case of real assets. A heterogeneous value differs across one or more dimensions. In this case, individual market participants may have different costs and benefits from holding a real asset. Investable Index has returns that an investor can match in practice by maintaining the same positions that constitute the index. Bloomberg Commodity Index (BCOM) formerly the Dow Jones-UBS Commodity Index, is a long-only index composed of futures contracts on 22 physical commodities. Production Weighted Index weights each underlying commodity using estimates of the quantity of each commodity produced. Production Weighted Index is designed to reflect the relative importance of each of the constituent commodities to the world economy Standard & Poor's Goldman Sachs Commodity Index (S&P GSCI) is a long-only index of physical commodity futures. Reuters/Jefferies Commodity Research Bureau (CRB) Index the oldest major commodity index and is currently made up of 19 commodities traded on various exchanges. Uses a four tier grouping system to weight the commodities Roll Return R(roll) = Spot Return + Collateral Yield + Roll Yield