CFA Level I · CFA Level I Exam · Pricing and Valuation of Futures Contracts
A commodity has a spot price of 500. Storage costs are 3% per year and the risk-free rate is 5% per year, both continuously compounded. The convenience yield is 1% per year. The no-arbitrage futures price for a one-year contract is closest to:
The futures price is closest to 537. Net cost of carry equals the 5% risk-free rate plus 3% storage minus 1% convenience yield, or 7%, so the futures price is 500 × e^0.07, about 536. Adding the convenience yield instead would overstate the price.
- A520
- B537Correct
- C552
Explanation
Net carry = 5% + 3% − 1% = 7%. F = 500 × e^0.07 = 500 × 1.072508 = 536.25, closest to 537. Ignoring the convenience yield gives 8%: 500 × 1.0833 = 541.6, about 542, which is not an option but 552 would stem from adding it. Using only 5% interest gives 525.6, near 520 distractor.
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