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

Which factor is most likely to push a commodity market into backwardation?

A high convenience yield from scarce inventories most likely causes backwardation. When holding the physical commodity is very valuable, the convenience yield exceeds interest and storage costs, so futures prices fall below spot. Higher storage costs or interest rates push toward contango.

  1. AA high convenience yield arising from inventory scarcityCorrect
  2. BHigh storage costs relative to spot
  3. CA rise in the risk-free interest rate
  4. DAbundant inventories with low spot-market demand

Explanation

Futures price = S*exp((r+u-y)T). Backwardation occurs when y exceeds r+u. Scarce inventories raise the convenience yield. High storage costs and higher rates raise carry cost, favoring contango, as do abundant inventories.

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