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

question 13

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%

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Definitions:

Purchase

The act of acquiring goods or services in exchange for money or other valuable consideration.

Old Model

Refers to a product, system, or item that has been replaced or surpassed by newer versions or models.

Mutual Mistake

A situation where all parties to a contract have a shared misunderstanding about a fundamental fact of the agreement.

Material Effect

A significant impact or change to a business or financial situation, often requiring disclosure to stakeholders.