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Answer: Equivalent to the commodity's spot price compounded at the risk-free rate over the contract's duration.
The forward price of an asset with benefits and costs is derived by compounding the spot price at the risk-free rate over the contract's life, adjusted for the future value of benefits and costs. When the net cost of carry is zero, the adjustment term becomes zero, simplifying the forward price to the spot price compounded at the risk-free rate. Thus, the forward price equals the spot price compounded at the risk-free rate when the net cost of carry is zero.
Author: LeetQuiz Editorial Team
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If the net cost of carry is zero, the forward price of a commodity is most likely:
A
Lower than the commodity's spot price compounded at the risk-free rate over the contract's duration.
B
Equivalent to the commodity's spot price compounded at the risk-free rate over the contract's duration.
C
Higher than the commodity's spot price compounded at the risk-free rate over the contract's duration.
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