CFA CFA Level 3 CFAI Mock A – Inflation hedge and commodities (Duke Q5)

CFAI Mock A – Inflation hedge and commodities (Duke Q5)

  • This topic has 8 replies, 3 voices, and was last updated Oct-17 by Alta12.
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  • Alta12
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    @vincentt @RaviVooda

    I thought for non-storable commodities such as agricultural commodities, it provides an inferior inflation hedge when compared to storable commodites such as precious metals. Am I right?

    CFAI mock answer states agricultural commodities provides inflation hedge. So it still does provide inflation hedge but not as well as storable commodities?

    RaviVooda
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    @alta12, agricultural commodities do not provide any inflation hedge. The answer might be wrong.

    Alta12
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    @ravivooda I agree with you. The mock answer is wrong. In the reading (Volume 5 p.54-55), it clearly states ‘Stocks and bonds in Exhibit 19 exhibit a negative correlation with unexpected inflation, as do some commodity classes (eg. agriculture, livestock and non energy). And the exhibit shows GSCI Agric has -0.27 correlation to unexpected inflation.

    vincentt
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    @RaviVooda @alta12 I’m not sure if i can agree with both your statements. As far as I know, commodities especially agriculture should provide hedge against inflation, when inflation is high, food prices usually go up, rarely happens during economy crisis (low inflation).

    In my opinion, precious metal does hedge against inflation as well but only performs better during economic down turn.

    But what you mentioned in your last comment is true, because you are referring to unexpected inflation not inflation in general.

    Alta12
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    @vincentt the mock referred to agricultural commodities being able to provide a hedge to unexpected inflation. Apologies my typo. I’m still confused.

    vincentt
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    @alta12 just to be clear, you are okay with the answer A? Because Justification 2 and 3 is definitely correct.

    Justification 2 is comparing agricultural commodities with conventional debt which is entirely out of the question when it comes to inflation.

    So looking at this line in the solution explanation:

    “Although somewhat less so for agricultural commodities than for energy, one of the principal roles that have been suggested for commodities in portfolio is as an inflation hedge during times of unexpected inflation and as a source of natural return over the long term.”.

    It’s saying energy commodities is a better inflation hedging asset than agricultural.

    Looking at schweser notes:

    “Whether a commodity is storable is the primary determinant in its value providing a hedge against unexpected inflation. For example, the values of storable commodities such as a precious metals, industrial metals, and energy are positively related to unexpected changes in inflation. That is, they tend to increase (decrease) in value with unexpected increases (decreases) in inflation. They have provided good diversification against unexpected inflation.

    Non-storable commodities like agricultural commodities have shown values that are negatively (positivey) affected by unexpected increases (decreases) in inflation. They haev not provided diversification against unexpected inflation.”

    So that matches what CFAI has explained.

    RaviVooda
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    @alta12, @vincentt overall how is this mock difficulty?

    vincentt
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    @RaviVooda‌ i’m looking to do either A or C, i’ve only did B.

    Alta12
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    Thanks @Vincentt. I understand now. @ravivooda I scored better in the CFAI mock than any of the Schweser practice exams. The ethics section in CFAI mock is much more tricky though.

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