Chartered Financial Analyst Level 2

Explanation

For commodity futures contracts, the value is influenced by the cost of carry model. The cost of carry includes:

• Storage costs - These increase the cost of holding the physical commodity
• Insurance costs
• Financing costs
• Convenience yield

When storage costs increase, the cost of carry increases, which typically leads to higher futures prices. This is because:

1. Higher storage costs make it more expensive to store the physical commodity
2. This increases the cost of carrying the commodity forward in time
3. According to the cost of carry model: Futures price = Spot price + Storage costs + Financing costs - Convenience yield
4. Therefore, an increase in storage costs directly increases the futures price

Why other options are incorrect:

• B. Forecasted profitability: This affects spot prices more directly than futures prices
• C. Periodic income received: Commodities typically don't generate periodic income like dividends or coupons

The correct answer is A because storage costs are a direct component of the cost of carry model that determines commodity futures prices.