Finance Quiz on Forward Prices
5 Questions
0 Views

Choose a study mode

Play Quiz
Study Flashcards
Spaced Repetition
Chat to lesson

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What happens to the forward price of a commodity when the present value of storage costs is greater than its convenience yield?

  • The forward price is the same as the spot price compounded at the risk-free rate.
  • The forward price is higher than the spot price compounded at the risk-free rate. (correct)
  • The forward price is independent of storage costs.
  • The forward price is lower than the spot price compounded at the risk-free rate.
  • If storage costs are high relative to convenience yield, what is the likely relationship between the forward price and the spot price?

  • The forward price is generally lower than the spot price.
  • The forward price equals the spot price.
  • The forward price becomes irrelevant to the spot price.
  • The forward price often exceeds the spot price when risk-free rates are considered. (correct)
  • What is implied if the present value of a commodity's storage costs is significantly higher than its convenience yield?

  • The forward price will remain the same as the current spot price.
  • The commodity's market value will decrease.
  • The forward price will likely be lower than current market rates.
  • The forward price may be higher than the spot price adjusted for risk-free interest. (correct)
  • In the context of commodity pricing, what does a higher present value of storage costs imply about forward pricing strategies?

    <p>It often leads to an increase in the forward price compared to the spot price.</p> Signup and view all the answers

    How does the concept of convenience yield affect the pricing of commodities in relation to storage costs?

    <p>The balance between convenience yield and storage cost can elevate the forward price.</p> Signup and view all the answers

    Study Notes

    Understanding Forward Price Relationships

    • Forward price is the agreed price for future delivery of a commodity, influenced by various market factors including storage costs and convenience yield.
    • Convenience yield reflects the benefits of holding a physical commodity versus holding a contract for future delivery, encompassing aspects like availability and usage.

    Storage Costs vs. Convenience Yield

    • Present value of storage costs represents the cost incurred for holding a commodity, accounting for factors like warehousing and insurance.
    • When the present value of storage costs exceeds the convenience yield, it indicates that the costs of physically holding the commodity outweigh the benefits of ownership.

    Implications on Forward Price

    • Under these conditions, the forward price of the commodity tends to be higher than the spot price compounded at the risk-free rate.
    • This relationship occurs because higher holding costs create upward pressure on forward prices, as investors seek compensation for the increased expense of holding the commodity.

    Summary of Outcomes

    • If storage costs are more significant than convenience yield:
      • Forward price is expected to surpass the spot price, adjusted for risk-free interest, reflecting a higher cost of carry.

    Studying That Suits You

    Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

    Quiz Team

    Description

    Test your understanding of forward prices in relation to present value storage costs and convenience yield. This quiz focuses on the key concepts of forward and spot pricing within commodity markets. Gain insights into how storage costs impact pricing decisions.

    More Like This

    Use Quizgecko on...
    Browser
    Browser