CFA Level I · CFA Level I Exam · Pricing and Valuation of Forward Contracts and for an Underlying with Varying Maturities
Compared with a forward contract on an otherwise identical asset with no storage costs, a forward contract on an asset with positive storage costs and no income will most likely have a:
The forward price will be higher. Storage costs add to the cost of carrying the asset until delivery, and the forward price must reflect all carrying costs under no-arbitrage pricing, whereas income or benefits from holding the asset would lower it.
- Alower forward price
- Bhigher forward priceCorrect
- Cforward price equal to spot
Explanation
Storage costs are a cost of carry paid by the holder of the asset, so they add to the forward price. Income received would reduce it. The forward price does not equal spot because financing also adds cost.
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