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Subject 3. Valuation of Commodities PDF Download
Stock and Bonds:

  • They represent financial assets. They are claims on the economic output (profits) of a business.
  • They generate periodic cash flows (interests and dividends).
  • Valuation is based on the estimation of future profitability and cash flows (NPV valuation method).

Commodities:

  • They are almost always physical assets with an intrinsic economic value.
  • The financial instruments that are based on commodities are not financial assets but derivative contracts with finite lifetimes.
  • The valuation of commodities is based on a discounted forecast of possible future prices (based on such factors as the supply and demand of the physical item).
  • Owning a commodity may incur transportation and storage costs (periodic cash outflows).
  • Commodity investment is primarily via derivatives. The futures market helps market participants with price discovery and hedging price risk when price is either a critical source of revenue or cost in their business operations.

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