Skip to content

FRM Part I · FRM Exam Part I · Commodity Forwards and Futures

A commodity's one-year forward price is USD 105.00 and its two-year forward price is USD 107.10. The continuously compounded risk-free rate is 4% per year, storage costs are zero, and both prices are no-arbitrage prices. What is the implied lease rate for the second year (the forward lease rate between years 1 and 2)?

The implied second-year lease rate is about 2.02%. The ratio of the two forward prices reflects one year of net carry, ln(1.02) or about 1.98%, and net carry equals the risk-free rate minus the lease rate. So the lease rate is 4% minus 1.98%, or 2.02%.

  1. A5.98%
  2. B1.98%
  3. C-2.02%
  4. D2.02%Correct

Explanation

F2/F1 = e^{(r-l)×1}, so ln(107.10/105.00) = ln(1.02) = 0.019803. Then l = 0.04 - 0.019803 = 0.020197, or about 2.02%. Adding the two (0.04 + 0.0198) gives 5.98%, which has the wrong sign. Taking 1.98% as the answer forgets to subtract it from r.

Did you get it right without looking?

One question tells you little. A timed set on Commodity Forwards and Futures shows your real accuracy, how long you take and where you lose marks.

Practise Commodity Forwards and FuturesFree diagnostic mock

More Commodity Forwards and Futures questions