I started preparing for the CFA level 2 2018. I’m reading alternative investments and in the last chapter I stumbled upon a question that was: Which swap type gives you more exposure to commodities A) Total return Swap B) Excess return Swap C) A basis Swap Any thoughts?
a) spot + roll + collateral
b) spot + roll
c) roll
i think the keyword is ‘more’… there can be a mix of positive/negative returns, but question doesn’t mention returns… only exposure.
I think since there is a collateral in the total return swap, that makes its exposure to the commodity market lower than an excess return swap. what are your thoughts?
‘exposure’ is a really loose word. collateral return might relate to the volatility of commodities - margining requirement.
and since it’s a swap you will be paying libor+x so any risk free component cancels out. i still say a)
perhaps you’re right bro
Exposure 'to commodities ’ - right? To commodities seems the key. Basis swap results in you being long and short so you have the most exposure with that one. Especially in percentage terms but likely in dollar terms too. Exposure on the collateral is not commodity exposure, it’s interest exposure, right?
I don’t know, the question is so trick . I’m kinda lost
I have no idea what the question wants - it is likely pointing to some random point mentioned in the preceding chapter. However, in real life, between the TRS and the excess return swap, the answer is likely to be the TRS, assuming the benchmark in the “excess” is an interest rate measure, which is usually positively correlated with the commodity; high rates = high inflation = commodity nominal price appreciation. There are some exceptions to this relationship, most notably gold or other safety assets. If this correlation was negative, then the excess return swap would magnify your commodity based returns.
Financial exposure is the amount that can be lost in an investment. Since an excess return Swap requires the long to make an upfront payment, that investor could lose it all ( if for example the index level stays below the agreed upon price) . However, In a Total return swap no payment is made at inception of contract. So the correct answer is Excess return Swap
Original question asks exposure to commodities, not financial exposure.
The right answer of the “right question” is Total Return Swap, in my opinion. 
LoL , it’s so frustrating that none of you guys agreed to Answer B 
what answer do you think is the correct one?
The question could have been worded like “which swap gives you exposure to only commodities”, or “which swap gives you most direct exposure to commodities”, in which case, the answer would be the excess return swap. However, they did not communicate this intent clearly.
If the question was “which swap gives you the most exposure to commodities” are you sure that the answer would be the excess return swap. How much is your confidence interval 
With no doubt the answer is “total return swap”. Like the name suggests it, the payer swap receives the return of being long only the commodity. An excess return swap provides an exposure limited to the spread between price commodity and some fixed or benchmark value so you limit your exposure to the commodity compared with being being long only the commodity like in the total return swap. Besides it’s optional. The exposure is contingent to the evolution of the price commodity going beyond a specific price. It is like owning a call on the commodity price.
The basis return swap exposure is limited to the difference between two commodity prices so the exposure to commodity is limited compared with a total exposure to a given commodity. It is like being long a commodity and short the other then the exposure is limited compared with being long only like a total return swap. But the return of all those swaps can vary. Total return swap gives no guarantee having the best payoff. The question can be misleading because we talk about exposure not return.