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:

Maintenance Agreement

A contract in which one party agrees to maintain an asset owned by another party, typically involving regular service checks and repairs.

Guaranteed Purchase Options

Provisions in insurance or financial contracts allowing the holder to acquire additional coverage or securities at predetermined conditions.

Capital Leases

Leasing agreements classified as purchases of assets for accounting purposes, due to their terms transferring substantial ownership rights to the lessee.

Sales-Type Leases

Leases where the lessor recognizes immediate profit on the transaction, similar to a sale, typically in equipment or vehicle leasing.