Managed Futures Questions

[yazena]

Both statements are correct, but do not seem to fully understand it. Is it possible to get an explanation from u guys…
After the meeting, Northrup tells his supervisor that the firm should consider managed futures as a diversification tool for client portfolios. His supervisor replies: “That may be a good idea because there are possibilities to earn positive excess returns using managed futures:
■ First, hedgers may pay a risk premium to liquidity providers, such as Commodity Trading Advisors (CTA), for the insurance that the hedgers obtain.
■ Second, CTAs are more likely to be able to conduct profitable arbitrage trades between stock, bond, futures, options, and cash markets because of differential carrying costs between investors.”
(Institute 120)
Institute, CFA. CFA Institute Level III 2014 Volume 5 Alternative Investments, Risk Management, and the Application of Derivatives. John Wiley & Sons P&T, 2013-07-12. VitalBook file.

 

[janakisri]

first statement : since the hedger has a committment to buy or sell the commodity at the expiration date , he requires a price guarantee . In other words he wants to pass on the risk of volatility in price to someone ( the CTA) . The CTA acts like a middle man , in return for a premium ( profit ) he undertakes to take the risk of price fluctutaions.
They enter into a futures contract with the futures price preset . At the term , the hedger deliver or takes delivery while the speculator ( CTA ) pays or receives the fixed or preset price.
second statement : CTA’s are in the business of making a profit by looking for price or timing arbitrage. They can look for deals that can be profitable because carrying costs like storage, financing , insurance , and transportation are all variables in the price components , and each player in the business faces a differnt advantage or disadvantage in each of these components , which can be traded off by the CTA for a profit

 

[Swaption11]

For the first question, think of a farmer and his crop. He has fixed costs and has a little control over the costs to produce corn. He benefits greatly from having a locked in price to deliver his crop at harvest as long as he expects a profit from the sale. If the total harvest is large, the supply will drive down the price potentially bankrupting him if he cant pay his mortgage. He will give a price break for certainty of income.
The second, there is a section that discusses the difference in pricing of futures because of risk free rate, convenience yield, lease rate, and storage costs. Review that and consider that if there are investors with different convenience, lease, and storage costs, then there are going to be different futures valuations for different investors. Like janakisri said, the CTA is just looking to be the middleman.