Natural Resources

Alternative Investments. Worth 7 to 10 percent of the exam. One session: the lesson, the rules, the method, then the questions.

Alternative InvestmentsNatural Resources
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The lesson

The video lesson for this unit is recorded and waiting to be published. Until it is, the rules and the method below carry everything this session needs; watching is a way of hearing it, not the only way of getting it.

The reading

No written reading for this unit yet. The rules and the method below, and the practice questions, still carry everything this session needs.

What this unit turns on

Read these before the questions, not after them. Everything here traces to this module's own lesson and to the 2026 outline.

No written rules are authored for this module yet. The questions below still carry a full explanation on every choice, and the next authoring lane closes this gap.

The practice run

Pick an answer, say how sure you are, then reveal. Being sure and wrong is the most useful thing that can happen in a session, so answer honestly: it sends the unit back to learning and puts it at the front of your revision queue.

Question 1Exam level

An investor holds a long position in crude oil futures. The current spot price of crude oil is $80 per barrel. The 3-month futures price is $83 per barrel, and the 6-month futures price is $86 per barrel. When the investor rolls the 3-month contract into the 6-month contract, the roll return is most likely:

How sure are you?

Correct: B. The correct answer is Negative, because the investor sells the cheaper near-term contract and buys the more expensive far-term contract.
A. You might see futures > spot and interpret this as the investor gaining on the price differential. Intuition says 'higher price is better.'. The investor is LONG futures, not short. Being long in a contango market means you must continuously roll into higher-priced contracts. You're always buying high.
C. Convergence to spot at expiration is a real phenomenon. Futures prices converge to spot as expiration approaches. You might partially remember this and apply it incorrectly to the roll. Convergence applies at expiration of a single contract, not during rolling.

Unit: natural-resources

Question 2Exam level

The total return on a fully collateralized commodity futures position most likely consists of which of the following components?

How sure are you?

Correct: B. The correct answer is Spot return, roll return, and collateral return.
A. You might learn spot return and roll return as the two 'interesting' components and forget collateral return because it seems like a technicality. Collateral return is explicitly tested. In practice it is economically significant. Posting $1,000,000 in T-bills as collateral earns the T-bill rate, which at 5% is $50,000/year. A material return component.
C. Convenience yield appears throughout the commodity reading and candidates incorrectly think it's a return component for the futures investor. Convenience yield is NOT a return component for a futures investor. It is a benefit of holding the PHYSICAL commodity (inventory optionality). The futures investor does not hold physical inventory and therefore does not receive convenience yield.

Unit: natural-resources

Question 3Exam level

A wheat futures market is in backwardation. A portfolio manager has a long position in near-term wheat futures. Which of the following best describes the roll return the portfolio manager will earn when rolling to the next futures contract?

How sure are you?

Correct: B. The correct answer is Positive, because the manager sells the near contract above the distant contract price.
A. This is the correct description of contango, not backwardation. Candidates who mix up the two market structures will choose A. In backwardation, it is the NEAR contract that is priced higher, not the distant contract. The exam always tests whether you know which direction the forward curve slopes in each market structure.
C. Backwardation IS often caused by supply shortages, and supply shortages DO often drive up spot prices. The connection is logical. Even if the causal reasoning is partly correct, answer D describes spot return (rising spot price), not roll return. These are separate components. The roll return in backwardation is positive regardless of whether the supply shortage also lifts the spot price.

Unit: natural-resources

Question 4Harder

The cost-of-carry model for commodity futures pricing states that the futures price (F) is most likely related to the spot price (S) by which of the following?

How sure are you?

Correct: B. The correct answer is F = S × (1 + risk-free rate + storage costs − convenience yield).
A. This looks like a standard cost-of-carry model from fixed income or FX. You might remember 'add carrying costs' and apply the formula mechanically without accounting for commodity-specific convenience yield. Commodities are unique: physical holders receive a convenience yield benefit that futures holders do NOT receive.
C. The signs are flipped. If you half-remember the formula and know both storage and convenience appear, it's easy to put them in the wrong direction. Storage costs ADD to futures price (you pay to store); convenience yield SUBTRACTS from futures price (physical holder benefits, so futures needs less premium). The signs in C are backwards.

Unit: natural-resources

Question 5Exam level

An analyst states: 'Commodity markets are in backwardation when futures prices exceed spot prices.' This statement is most likely:

How sure are you?

Correct: B. The correct answer is Incorrect, because backwardation occurs when spot prices exceed futures prices.
A. The phrase 'premium for future delivery' sounds like it could justify futures > spot. Delivery in the future should require a premium, right? Normal backwardation theory (Keynes) actually says futures are priced BELOW expected future spot as a risk premium paid to speculators who go long. Premiums are associated with contango, not backwardation.
C. Answer D is actually a TRUE statement about WHEN backwardation occurs (convenience yield > storage costs and risk-free rate). Candidates who recognize this truth may mark D thinking the original statement is 'correct but for the wrong reason.'. The question asks whether the ANALYST'S STATEMENT is correct.

Unit: natural-resources

Question 6Exam level

Which of the following best describes convenience yield?

How sure are you?

Correct: C. The correct answer is The benefit of holding a physical commodity that provides operational or insurance value.
A. Collateral return and convenience yield both appear in the commodities reading and both relate to 'returns' from holding commodity positions. Easy to confuse the two. Collateral return is the return on T-bills or other securities posted as margin for futures contracts. Convenience yield is an implicit benefit of holding physical inventory. They are completely different concepts.
B. This is the exact opposite of the correct answer. It describes the benefit of the FUTURES rather than the physical commodity. Candidates who half-know the concept may invert it. Convenience yield accrues to physical holders, not futures holders. It is the benefit you GIVE UP by holding futures instead of physical commodity. Futures holders do not receive convenience yield;

Unit: natural-resources

Question 7Harder

A commodity market is characterized by high storage costs and low convenience yield. Under these conditions, the forward curve is most likely:

How sure are you?

Correct: B. The correct answer is In contango, because high storage costs increase futures prices and low convenience yield provides minimal offset.
A. You might think 'high cost = lower price'. If it's expensive to store, the futures MUST be worth less. This logic sounds intuitive but is backwards. Storage costs are PAID by the physical commodity holder. To compensate for this cost relative to holding futures, spot commodity must be priced at a discount (or futures at a premium).
C. If convenience yield is low, perhaps physical holding is less attractive, making futures more desirable. This logic sounds plausible. Low convenience yield means there is little benefit to holding physical, so there is no force pulling spot ABOVE futures. Combined with high storage costs (which push futures above spot), the market is in contango, not backwardation.

Unit: natural-resources

Question 8Exam level

A pension fund invests $10 million in a fully collateralized commodity futures index. Over one year, the spot price of the commodity index increases 5%, the roll return is -3% (contango market), and the collateral earns 4% (T-bill rate). The total return on the commodity futures position is closest to:

How sure are you?

Correct: B. The correct answer is 6%.
A. Candidates who only remember the spot return answer 5%. This is the 'incomplete formula' trap. They know spot return matters but forget roll and collateral. 5% ignores both the -3% roll drag and the +4% collateral return. Full formula must be used.
C. You might add 5% + 4% = 9%, including spot and collateral but forgetting to subtract the roll return drag. The roll return is -3% (negative, because contango market). It must be subtracted. 5% + 4% − 3% = 6%, not 9%.

Unit: natural-resources

Question 9Exam level

Which of the following commodities is MOST likely to trade in backwardation under normal market conditions?

How sure are you?

Correct: B. The correct answer is Wheat, due to seasonal harvests creating periodic supply gluts and shortages.
A. Gold has high storage costs, and 'industrial demand' sounds like it could create shortage-driven backwardation. Gold's convenience yield is essentially zero. You cannot 'use' gold in production the same way you use oil or wheat. Its high storage costs push futures prices UP relative to spot (contango). Gold is the textbook contango commodity.
C. The 'cost of carry' is the basic theoretical framework, and candidates who learn 'futures = spot + carrying costs' may believe contango is always the default. Cost of carry only drives contango when storage costs + risk-free rate exceed convenience yield. When convenience yield is high (seasonal demand spikes, supply shortages), the market can move into backwardation.

Unit: natural-resources

Question 10Exam level

An investor in a commodity futures ETF notices that over 12 months, the ETF's return is significantly lower than the change in the underlying commodity's spot price. The most likely explanation is:

How sure are you?

Correct: C. The correct answer is The commodity futures market is in contango, creating negative roll returns that drag total returns below spot returns.
A. Management fees are real and do matter. Candidates who don't know the commodity-specific answer default to 'fees' as the universal explanation for fund underperformance. While fees matter, the question specifies 'significantly lower' and the systematic explanation for commodity ETF underperformance vs spot is roll drag from contango, not fees. Fees are typically 0.5-1% for commodity ETFs;
B. Collateral return is a real component of commodity futures returns. If the collateral earns a negative return, total return falls. Collateral is typically invested in T-bills, which earn the risk-free rate (positive or at worst near zero). Negative collateral returns are extremely rare and would require negative interest rates, which is a separate scenario.

Unit: natural-resources

Question 11Harder

Under the theory of normal backwardation (Keynes), futures prices are most likely:

How sure are you?

Correct: B. The correct answer is Expected to be below future spot prices because speculators demand compensation for taking on price risk.
A. Producers DO pay a risk premium. This part of the statement is true. Candidates who remember 'producers pay' select A without checking where the futures price lands relative to expected spot. Producers pay the premium by accepting a LOWER futures price (they lock in a lower price than expected spot to get hedging certainty).
C. We've learned that convenience yield can push spot above futures (backwardation). Answer D sounds like it's describing backwardation from the convenience yield angle. Answer D confuses the cost-of-carry model's mechanism (convenience yield causing spot > near-term futures) with Keynes's theory of NORMAL backwardation (futures below EXPECTED FUTURE spot as risk premium).

Unit: natural-resources

Question 12Exam level

Which of the following factors would MOST likely cause a commodity market to shift from contango to backwardation?

How sure are you?

Correct: B. The correct answer is A sudden supply disruption causing immediate shortages.
A. Storage capacity seems related to the cost-of-carry model. More storage could mean lower storage costs. If storage costs decrease, perhaps backwardation follows. Increased storage capacity reduces storage costs, which would DECREASE the futures premium and could reduce contango but would not typically create backwardation.
C. Risk-free rate appears in the cost-of-carry formula. An increase in r increases F = S × (1 + r + s − c). You might may think this creates backwardation somehow. Higher risk-free rate increases futures prices (F goes UP relative to S), deepening contango. It does the opposite of creating backwardation.

Unit: natural-resources