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

A commodity has spot price 80, risk-free rate 5% per year (annual compounding), and storage costs with a future value at expiration of 2.00 for a one-year contract. The commodity provides no convenience yield. The futures contract is quoted at 88.00. The most likely arbitrage profit at expiration per unit is closest to:

Fair futures price is 80 × 1.05 plus storage of 2.00, or 86.00. The quoted price of 88.00 exceeds this by 2.00, so selling futures and buying the commodity locks in about 2.00 at expiration.

  1. A0.00
  2. B1.20Correct
  3. C2.00

Explanation

Fair price = 80 × 1.05 + 2.00 = 86.00. The quote of 88.00 is above it by 2.00. Selling the futures and buying the commodity with borrowed money yields a profit of 88 − 86 = 2.00. Rework: the closest answer is 2.00, so the keyed option must be 2.00.

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