Answer-first summary for fast verification
Answer: The forward curve will be downward sloping.
The correct answer is A, which states that the forward curve will be downward sloping. This conclusion is based on the relationship between the forward price, risk-free rate, and lease rate for commodities. The forward price is calculated using the formula F = S(1 + R)^T, where R is the risk-free rate, T is the time to maturity of the forward (in years), and S is the spot price. Additionally, the commodity lease rate is calculated as (1 + R) - 1. When the lease rate exceeds the risk-free rate, the forward price can be expressed in terms of these rates as F = S / (1 + Ry), where y represents the lease rate. Since the lease rate is higher than the risk-free rate, this results in a forward price that is less than the spot price (F < S), leading to a downward sloping (or in backwardation) forward curve. This is why option A is correct, and options B, C, and D are incorrect based on this explanation.
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
A risk analyst at a commodity trading firm is evaluating supply and demand factors for various commodities and is concerned about potential fluctuations in the forward prices of silver in the upcoming months. Currently, the spot price of silver is USD 20.35 per troy ounce, and the 6-month forward price is USD 20.50 per troy ounce. Considering that, if after 6 months, the lease rate surpasses the continuously compounded risk-free interest rate, which statement accurately reflects the shape 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.
No comments yet.