Answer-first summary for fast verification
Answer: The forward curve will be downward sloping.
A is correct. The forward price is computed as: F = S(1 + R)T where R is the risk-free rate, T is the time to maturity of the forward (measured in years), and S is the spot price. The commodity lease rate is computed as (1+R)-1 So, the forward price can alternatively be expressed in terms of risk-free rate and lease rate as: Therefore, as the risk-free rate falls below the lease rate, we can see from the forward price formula above that F < S, and the forward curve will be downward sloping (in backwardation). B, C, and D are incorrect per the explanation for A above.
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
No comments yet.
A risk analyst at a commodity trading firm is conducting an analysis of the supply and demand dynamics for commodities, specifically focusing on the medium-term volatility of silver's forward prices. Currently, the spot price for silver is USD 20.35 per troy ounce, and the 6-month forward price is USD 20.50 per troy ounce. Considering that after a 6-month period the lease rate is anticipated to surpass the continuously compounded risk-free interest rate, what will be the accurate description of the silver forward curve at that time?
A
The forward curve will be downward sloping.
B
The forward curve will be upward sloping
C
The forward curve will be flat.
D
The forward curve will be humped.