NISM Certifications · NISM-Series-XV: Research Analyst · Fundamental Analysis of Commodities
A bullion trader finds that the spot price of a commodity is Rs 60,000 per unit. Storage, insurance and financing costs to carry it for 3 months total Rs 1,500 per unit, and there is no convenience yield. Using the simple cost-of-carry model, the fair 3-month futures price is:
The fair futures price is Rs 61,500. Under the cost-of-carry model with no convenience yield, futures equal spot plus the carrying costs of storage, insurance and finance. Adding Rs 1,500 to the spot price of Rs 60,000 gives the three-month fair value.
- ARs 58,500
- BRs 61,500Correct
- CRs 60,000
- DRs 63,000
Explanation
Fair futures price = spot + cost of carry = 60,000 + 1,500 = Rs 61,500. Rs 58,500 results from wrongly subtracting the carry cost. Rs 60,000 ignores carry entirely. Rs 63,000 doubles the carry cost.
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