Question #2
Reading: Reading 32 Introduction to Commodities and Commodity Derivatives
PDF File: Reading 32 Introduction to Commodities and Commodity Derivatives.pdf
Page: 1
Status: Correct
Correct Answer: A
Question
Which of the following statements regarding the pricing of commodity futures contracts is most accurate?
Answer Choices:
A. The arbitrage free price of a commodities futures contract is often lower than that of a financial security futures contract due to storage costs
B. Commodities that are subject to sudden and large demand shocks may exhibit backwardation in the futures market due to significant convenience yields
C. The convenience yield for a commodity is positively correlated with the futures price
Explanation
Storage costs increase the price of commodities futures contracts. If a commodity is
subject to demand shocks the benefit from holding the commodity is higher and hence the
higher convenience yield may force the futures market into backwardation. Higher
convenience yields reduce the futures price.