Risk return profile of commodity derivatives: an investors perception

Abstract

This article provides an overview of the literature on the commodity market, with a particular focus on the risk of commodity investment. The sources of return in the commodity market are examined, as well as the impact of various macroeconomic factors such as interest rates and inflation on the return. The commodity market is an increasingly popular investment opportunity for investors looking to diversify their portfolio. However, investing in commodities is not without risk. The volatility of commodity prices can lead to significant losses for investors, especially those who are not familiar with the market. One of the primary sources of return in the commodity market is through price appreciation. This is driven by supply and demand factors, such as changes in weather patterns, geopolitical events, and changes in consumer tastes. In addition, commodities can also generate returns through passive income, such as through rental income from real estate or dividends from stocks. Interest rates and inflation are two key macroeconomic factors that can have a significant impact on the return of commodity investments. Higher interest rates can lead to lower commodity prices, as investors seek out higher yield investments. Inflation can also impact the return of commodity investments, as it can lead to higher prices for raw materials and other inputs. For wheat, corn, and soybean futures, seasonality of return is an important consideration for investors. The prices of these commodities are often influenced by seasonal factors, such as weather patterns and harvest cycles. Understanding these seasonality patterns can help investors make more informed investment decisions. In conclusion, this study is mostly descriptive in nature, providing an overview of the literature on the commodity market and the risks associated with commodity investment. The impact of various macroeconomic factors, such as interest rates and inflation, on the return of commodity investments is also examined. Finally, the seasonality of return for wheat, corn, and soybean futures is discussed as an important consideration for investors.