CFA Level I · CFA Level I Exam · Pricing and Valuation of Futures Contracts
An asset's futures price is below its spot price, with no financial arbitrage available. This pattern (backwardation) is most likely explained by:
Backwardation is most likely explained by a convenience yield larger than the cost of carry. Because futures price equals spot compounded at the risk-free rate plus storage minus convenience yield, a large convenience yield pushes the futures price below spot.
- Aa convenience yield exceeding the net cost of carrying the assetCorrect
- Ba risk-free rate exceeding the asset's income yield
- Chigh storage costs relative to the convenience yield
Explanation
Futures price equals spot grown at (r + storage − convenience yield). It falls below spot only when the convenience yield exceeds r plus storage costs. A high risk-free rate or high storage costs raise the futures price, producing contango.
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