Answer-first summary for fast verification
Answer: The forward curve will be downward sloping.
## Explanation The forward price formula for commodities is: \[ F = S \times e^{(r - l)T} \] Where: - \( F \) = forward price - \( S \) = spot price - \( r \) = continuously compounded risk-free interest rate - \( l \) = lease rate (convenience yield minus storage costs) - \( T \) = time to maturity **Current Situation:** - Spot price = USD 20.35 - 6-month forward price = USD 20.50 - This implies \( r - l > 0 \) (since forward > spot) **After 6 Months:** - Lease rate (l) rises above interest rate (r) - This means \( r - l < 0 \) When \( r - l < 0 \), the forward price formula becomes: \[ F = S \times e^{(r - l)T} < S \] This means forward prices will be **below** spot prices, creating a **downward sloping** (backwardated) forward curve. **Therefore, the correct answer is A: The forward curve will be downward sloping.** A downward sloping forward curve indicates that the market expects future prices to be lower than current spot prices, which typically occurs when there are current supply shortages or high convenience yields (reflected in the lease rate).
Author: LeetQuiz .
Ultimate access to all questions.
A risk analyst at a commodities trading firm is examining the supply and demand conditions for various commodities and is concerned about the volatility of the forward prices for silver in the medium term. Currently, silver is trading at a spot price of USD 20.35 per troy ounce and the six-month forward price is quoted at USD 20.50 per troy ounce. Assuming that after six months the lease rate rises above the continuously compounded interest rate, which of the following statements is correct about the shape of the silver forward curve after six months?
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.