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Answer: Storage costs of agricultural commodities cause futures prices to display a mixture of normal and inverted pricing patterns.
C is correct. The seasonal nature of supply causes producers to store agricultural commodities, incurring storage costs and causing futures prices to display both normal and inverted pricing patterns in the term structure. Storage costs are an important factor for agricultural commodities due to their perishable nature and the need for preservation during off-season periods. This leads to variations in the cost of carrying the commodity over time, which in turn affects the futures prices. Normal pricing occurs when the futures price is higher than the expected future spot price adjusted for costs, while inverted pricing happens when the futures price is lower than this adjusted spot price. The presence of storage costs can cause the futures curve to shift between these two patterns depending on the time of year and the supply-demand balance.
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A commodities dealer is exploring the various factors influencing the pricing of commodity futures contracts. In addition to supply and demand fluctuations, the dealer identifies that storage costs, rental expenses, and convenience yield (the non-monetary benefits of holding onto the physical commodity) can also impact the prices of these futures. Which of the following statements most precisely describes one of these factors?
A
Storage cost is the main factor influencing the prices of long-term commodity futures contracts on industrial metals.
B
Lease rates on commodities are typically equal to the relevant risk-free interest rate and have a lower bound of zero.
C
Storage costs of agricultural commodities cause futures prices to display a mixture of normal and inverted pricing patterns.
D
Convenience yield is a charge subtracted from the lease rate by the lender of a commodity
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