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Answer: Storage costs of agricultural commodities cause futures prices to display a mixture of normal and inverted pricing patterns.
**C is correct.** The seasonal nature of supply causes producers to store agricultural commodities, incurring storage costs and causing futures prices to display both normal and inverted pricing patterns in the term structure. **A is incorrect.** Storage costs of commodities are generally very low compared to the price of the commodity and can therefore be ignored. The futures pricing formula is F = S * exp[(C – Y) * T], where C is the cost of carry and Y is the convenience yield. **B is incorrect.** The lease rate for an investment commodity is the interest rate charged to borrow the underlying asset. Occasionally, the lease rate can be negative, which may allow arbitrageurs to buy the metal and sell it forward for a profit. **D is incorrect.** The convenience yield is added to the lease rate and measures the extent to which an owner of a consumption asset values holding quantities of the asset readily available as inventory.
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A commodity trader is researching factors that impact the prices of commodity futures contracts. In addition to the supply and demand dynamics, the advisor identifies storage costs, lease rates, and convenience yields as factors that can influence commodity futures prices. Which of the following statements best describes one of these factors?
A
Storage cost is the main factor influencing the prices of long-term commodity futures contracts on industrial metals.
B
Lease rates on commodities are typically equal to the relevant risk-free interest rate and have a lower bound of zero.
C
Storage costs of agricultural commodities cause futures prices to display a mixture of normal and inverted pricing patterns.
D
Convenience yield is a charge subtracted from the lease rate by the lender of a commodity.