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Commodity update 73
For ETPs where commodities are an underlying, these are qualities you as an investor must be aware of.
Unlike shares, which are "perpetual" physical ownership interests in a company, commodities are traded as time-limited contracts.
Forward and Futures
The contracts which are used to trade commodities are called forward or futures contracts. Commodities in the market are traded with an agreement on either physical delivery (forward) or a cash settlement (future) on a defined date in the future. This is by far the most common way in which most commodities are traded in the market.
Rolling
This means that an ETP that derives its exposure from commodities must periodically change the underlying commodity contract, as these will eventually expire. Such a change, where the old contract is sold and the new one is bought, is called a “roll”. A rolling of the future contract can mean that the new contract costs more per unit than the old one (contango in the forward curve). A roll can also mean that the new contract costs less per unit than the old one (backwardation in the forward curve).
Contracts are renewed
In the discussion of the «oil price», one is often based on the spot price or the raw material contract that at all times has the shortest time for delivery, and when it is further written that the «price» (over a longer period of time) has changed by x%, it will It is a question of a return that it is not possible to achieve as an investor, since the contracts will eventually expire and will have to be replaced with new ones with longer maturities, which do not necessarily cost the same per unit. However, this will not affect the value of the product per se.
Rebalanced every day to keep leverage
In the same way as ETPs based on stocks or stock indices, commodity-based products must also be rebalanced every day to maintain the leverage factor. In addition, ETPs with commodities as underlying often have currency risk, since underlying commodities contracts are often traded in currencies other than SEK.