Question #3
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
Roger Torsten is studying historical data on the commodities markets to assist with his a forecast he is producing in his role as an economic researcher. He has observed long periods in the past when the term structure of the futures market for a commodity displays a negative trend. Which of the following explanations is most likely an explanation for this observed trend?
Answer Choices:
A. Due to an increase in the supply of the commodity, the convenience yield has dropped to nearly zero
B. Producers concerned about a potential drop in price of the commodity are taking hedging positions to lock in a sales price
Explanation
for this
observed trend?
A)
Due to an increase in the supply of the commodity, the convenience yield has
dropped to nearly zero.
B)
Producers concerned about a potential drop in price of the commodity are
taking hedging positions to lock in a sales price.
C)
Manufacturers, concerned about increasing commodity prices are buying
commodity futures to hedge input costs.
Explanation
Producers taking short hedges will force the futures price down and may well lead to
backwardation. If manufacturers are taking out long hedges the term structure is likely to
be in contango. High convenience yields would lead to backwardation.