FRM Part I · FRM Exam Part I · Commodity Forwards and Futures
A gold dealer can buy gold spot at USD 2,000 per ounce. Storage costs are negligible, and the continuously compounded risk-free rate is 4% per year. What is the no-arbitrage price of a 1-year forward contract on gold (to the nearest dollar)?
The forward price is about USD 2,082. With no storage costs or convenience yield, the forward equals spot compounded at the risk-free rate: 2,000 times e to the power 0.04, which is 2,081.62. Simple interest would understate it.
- AUSD 2,000
- BUSD 2,080
- CUSD 2,082Correct
- DUSD 1,922
Explanation
With no storage cost or convenience yield, F = S e^(rT) = 2,000 × e^0.04 = 2,000 × 1.040811 = 2,081.62, about USD 2,082. The USD 2,080 option uses simple interest (2,000 × 1.04), which ignores continuous compounding. The USD 1,922 option discounts instead of compounding.
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.
More Commodity Forwards and Futures questions
- The spot price of crude oil is USD 80 per barrel. The risk-free rate is 5% per year with continuous compounding, storage costs are 2% of spo…
- A jewelry maker expects to buy gold in three months and wants to protect against a price increase. Which position in gold futures is appropr…
- Spot natural gas trades at USD 3.00 per MMBtu. The continuously compounded risk-free rate is 3% per year and storage costs are 1% per year (…
- A market shows a commodity futures curve where longer-dated contracts trade at lower prices than nearby contracts. Which explanation is most…
- A gold spot price is USD 2,000 per ounce. The continuously compounded risk-free rate is 4% per year, and storage costs and the convenience y…
- A cattle feeder is short hedged. Over the hedge period the basis (spot minus futures) moves from -2.00 to -0.50. Relative to the originally …