A Commodity Has a Spot Price of $25 and a One-Month

question 10

Multiple Choice

A commodity has a spot price of $25 and a one-month forward price of $25.02.The one-month risk-free rate is 2% in continuously compounded and annualized terms.Assuming no other costs or benefits of carry on the commodity,what must be the lower bound on the convenience yield that prevents arbitrage?

• A)0%
• B)1%
• C)2%
• D)3%

---

Definitions:

Abnormally Dangerous

Activities or conditions that inherently carry a significant risk of substantial harm, even when reasonable care is taken.

Pesticide Spray

The application of chemicals designed to control, repel, or kill pests on plants, soil, or other surfaces.

Contributory Negligence

Contributory negligence is a legal doctrine that denies or limits a plaintiff's ability to recover damages if their own negligence contributed to the harm they suffered.

Reasonable Person

A hypothetical individual in society who exercises average care, skill, and judgment in conduct and who serves as a comparative standard for determining liability.