Identify Alternative Asset Risks - Series 65
- Which futures-curve condition typically creates negative roll yield for long positions?
- Contango. Investors rolling contracts buy at higher prices, eroding returns through negative yield on the roll.
- What is the key economic characteristic of commodities that drives their prices?
- Supply-and-demand sensitivity to production, weather, and geopolitics. Prices fluctuate due to imbalances from factors like crop failures, natural disasters, or political instability affecting supply chains.
- What is the principal risk of commodity ETNs compared with commodity ETFs?
- Issuer credit risk (ETN is an unsecured debt obligation). ETNs are unsecured notes reliant on issuer solvency, unlike ETFs backed by actual commodity holdings.
- What is private-key risk for digital asset investors?
- Loss or compromise of keys can cause irreversible loss of assets. Private keys enable sole control; their loss prevents access without recovery mechanisms in decentralized systems.
- What is margin risk in futures trading for commodities?
- Adverse moves can trigger margin calls and forced liquidation. Price declines deplete margin, requiring additional deposits or risking automatic position closure at losses.
- What is basis risk in commodity hedging or futures-based commodity exposure?
- Spot and futures prices may not move in perfect alignment. Hedging effectiveness diminishes if the futures contract diverges from the underlying asset's price movements.
- What is a precious metal as an alternative investment category?
- A scarce metal (for example gold) held for value, not for income. Precious metals serve as stores of value due to rarity and historical use, distinct from income-generating assets.
- What is the primary cash-flow characteristic of precious metals like gold?
- No income: no interest, dividends, or contractual cash flows. Value derives solely from price appreciation, lacking yields typical of traditional investments like bonds or equities.
- What is the primary risk of investing in physical commodities directly?
- Storage, insurance, and transportation costs and potential loss or damage. Physical holdings incur ongoing expenses and vulnerabilities not present in financialized commodity investments.
- What is custody risk when investing in physical precious metals?
- Risk of theft, loss, fraud, or inadequate vaulting/insurance controls. Physical assets require secure handling to mitigate threats inherent in tangible ownership.
- What is the primary regulatory risk associated with digital assets?
- Changing rules may restrict trading, custody, or classify tokens as securities. Evolving laws can impose new compliance burdens or alter asset status, impacting viability and investor access.
- What is a commodity in the investment context for Series 65 purposes?
- A basic raw material traded in standardized units (spot or futures). Commodities fit alternative investments by providing exposure to raw materials via standardized trading for hedging or speculation.
- What is backwardation in commodity futures markets?
- Futures prices are lower than spot (downward-sloping futures curve). Occurs when near-term demand exceeds supply, inverting the curve as spot commands a premium over futures.
- What is the key difference between owning bullion and owning a mining stock?
- Bullion tracks metal price; mining stock adds business and equity risk. Mining stocks introduce operational, management, and market risks beyond pure commodity price exposure.
- What is the main difference between spot and futures commodity pricing?
- Spot is current cash price; futures is price for future delivery date. Spot reflects immediate market conditions, while futures incorporate expectations, storage costs, and time value.
- What is liquidity and market-manipulation risk in many digital asset markets?
- Thin markets and concentrated holders can amplify volatility and distort prices. Limited trading depth allows whales to sway prices, exacerbating swings and enabling manipulative practices.
- What is a digital asset in the Series 65 alternative investments context?
- A blockchain-based token (cryptocurrency or similar) with market value. Digital assets represent tokenized value on distributed ledgers, offering decentralized alternatives to traditional finance.
- What is a commodity's inflation-hedge characteristic most directly tied to?
- Prices of inputs and goods tend to rise with inflation, but not reliably. As inflation increases costs, commodity values often rise, though correlations vary by type and economic conditions.
- What is leverage in commodity futures and why does it increase risk?
- Small margin controls large notional value, magnifying gains and losses. Futures use margin to control large exposures with minimal capital, heightening volatility and potential for outsized outcomes.
- Identify the main operational risk of using crypto exchanges or custodians.
- Counterparty failure, hacking, fraud, or withdrawal freezes. Centralized platforms are prone to breaches and operational failures, risking user funds without traditional safeguards.
- What is the primary market risk common to both commodities and precious metals?
- High price volatility driven by macro factors and investor sentiment. Both asset classes experience sharp swings from economic indicators, global events, and speculative trading.
- What is the defining characteristic of most cryptocurrencies regarding cash flows?
- They generally produce no intrinsic cash flow; value is market-driven. Unlike stocks or bonds, most derive value from scarcity and adoption rather than underlying earnings or interest.
- Which metal is most commonly viewed as a monetary metal and store of value?
- Gold. Gold's historical role in monetary systems and as a safe-haven asset underpins its perceived stability during crises.
- What is contango in commodity futures markets?
- Futures prices are higher than spot (upward-sloping futures curve). Arises when carrying costs like storage exceed convenience yields, leading to higher prices for longer-dated contracts.
- Which futures-curve condition typically creates positive roll yield for long positions?
- Backwardation. Rolling into lower-priced contracts generates gains, enhancing returns for holders of long positions.