6. A commodity’s spot price as of December 31 is $36/unit, and storage costs are

Question

6. A commodity’s spot price as of December 31 is $36/unit, and storage costs are $0.72/unit at the end of every month, starting January 31. If the effective monthly interest rate is 0.9% (compounded monthly, not continuously), what will be the forward price for delivery at the end of August, assuming the commodity is stored?

a. $44.78

c. $44.44

d. $41.94

e. $44.86

7. Suppose the spot price of a commodity is $27 per unit. The 3, 6, 9, and 12-month forward prices for the commodity are $27.31, $27.63, $27.95, and $28.27, respectively. This forward curve is an example of...

b. neither contango nor backwardation.

c. both contango and backwardation.

d. backwardation.

Explanation / Answer

6.

7. If observed carefully, the forward prices are greater than the spot price of commodity, which simply reflects that it is contango which has this behaviour where forward prices are greater than spot prices.

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Monthly Interest rate 0.90% 0.72 Storage cost paid at the end of per month 0 1 2 3 4 5 6 7 1.009 1.009 1.009 1.009 1.009 1.009 1.009 1.009 1.000 1.009 1.018 1.027 1.036 1.046 1.055 1.065 0.72 0.72648 0.733018 0.739615 0.746272 0.752988 0.759765 0.766603 Opportunity cost of storage cost 5.944742927 Commodity spot price 36 /unit total interest cost =(1+.09%)^8 1.074309 Forward price without storage cost =36*1.074309 38.67512 Forward price of commodity with storage cost 44.61986293

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