Commodities have negative correlation with stocks and bonds and, therefore, improve the risk-adjusted return of the portfolio.
The past several decades have seen explosive growth in exchange-traded commodity futures across the globe. A wealth of research has conclusively established the potential benefits of including exposure to commodities in traditional financial portfolios. Commodities have negative correlation with stocks and bonds and, therefore, improve the risk-adjusted return of the portfolio. These properties (negative correlation with stocks and bonds and lower volatility) of commodities make them an ideal asset for diversification and increase the attractiveness of a portfolio.
Commodity exchanges worldwide offer lot of economic benefits in the form of greater price discovery enabling more efficient pricing in underlying spot market, risk transfer between various heterogeneous market participants, greater transparency and better price dissemination on a nationwide scale, rationalization of transaction costs and better margins for producers. Commodity futures exchange is a facilitator of numerous functions, viz., hedging and arbitrage, bulk trades, investment opportunities, balancing back price differences by areas and times and fair price indication. |
