An Investment Linked to Commodity Futures
Professor Richard Spurgin
FIN 5310 – 1
Motivation for issuing the security
Prior to the Swedish Export Credit Co. issued the security, the performance of the GSCI showed that this index was clearly attractive. First, the increasing-trend cumulative total returns were higher than the returns on S&P 500 and the Treasury bonds, and then it became more diversified with more futures contracts introduced after 1980. Besides, another attractive feature of the GSCI was its ability to act as a hedge against inflation because it had a strong positive correlation with the two most widely used measures of inflation: CPI and PPI. In addition, the investment on the GSCI had the potential to decrease the risk of a portfolio because its returns were negatively correlated with returns on stocks and bonds.
We could examine the index performance more specifically. The total returns on the GSCI consisted of three components, the yield from the collateral Treasury bill, the spot return and the roll yield from the futures. According to the total return of the GSCI prior to 1990, we could find that the contribution of the T-bill yield was substantial and relatively stable while that of the spot return was small on average and extremely volatile and that of the roll yield was positive though somewhat volatile. The primary source of return changed based on different period with different financial environment and weighting strategy. Spot return contributed a lot in the inflationary period while the roll yield contributed more in the disinflationary period.
As for the returns after 1991, we consider it reasonable to assume that the GSCI would continue to generate hefty returns. Since the prices of crude oil futures included in the GSCI had been in backwardation 80% to 85%, GSCI generated high roll yield that significantly contribute to the total return...
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