Skip to content

CFA Level I · CFA Level I Exam · Pricing and Valuation of Futures Contracts

A commodity forward is priced with a spot price of 50, continuously compounded risk-free rate of 3%, and storage costs, with a convenience yield that exceeds storage costs. Relative to a forward priced with only the risk-free rate, the observed forward price is most likely:

The forward price is lower. The cost of carry equals the risk-free rate plus storage costs minus convenience yield. When convenience yield exceeds storage costs, the net carry falls below the risk-free rate, so the forward price is below the risk-free-only value.

  1. Alower, because net convenience yield reduces the cost of carryCorrect
  2. Bequal, because convenience yield is ignored in arbitrage pricing
  3. Chigher, because storage costs are added to the cost of carry

Explanation

Cost of carry includes the risk-free rate plus storage costs minus the convenience yield. When convenience yield exceeds storage costs, net carry is lower than the risk-free rate alone, so the forward is lower. The storage-cost-only argument ignores the larger convenience yield.

Did you get it right without looking?

One question tells you little. A timed set on Pricing and Valuation of Futures Contracts shows your real accuracy, how long you take and where you lose marks.

Practise Pricing and Valuation of Futures ContractsFree diagnostic mock

More Pricing and Valuation of Futures Contracts questions