Chartered Financial Analyst Level 2

Explanation

According to the theory of storage, the futures price (F) is related to the spot price (S) by the formula:

F = S + Storage Costs - Convenience Yield

Where:

• Storage Costs increase the futures price (positive relationship)
• Convenience Yield decreases the futures price (negative relationship)

To maximize the increase in futures contract price:

• Increase in storage costs → Increases futures price
• Decrease in convenience yield → Increases futures price (since it's subtracted)

Option B combines both factors that increase futures price:

• Increase in storage costs → Higher futures price
• Decrease in convenience yield → Higher futures price

Option A has conflicting effects:

• Decrease in storage costs → Lower futures price
• Decrease in convenience yield → Higher futures price

Option C has conflicting effects:

• Increase in storage costs → Higher futures price
• Increase in convenience yield → Lower futures price

Therefore, Option B provides the greatest increase in futures contract price as both factors work in the same direction to increase the futures price.