Explanation:
The relationship between net costs of carry and forward price is determined by the cost-of-carry model:
Forward Price = Spot Price × (1 + r)^t + Net Cost of Carry
Where:
Key Concept:
Why Option B is correct: If costs of carry exceed benefits, the forward price must be higher to compensate the seller for these additional costs. This creates a contango market structure where forward prices exceed spot prices.
Why Option A is incorrect: This would imply that higher costs lead to lower forward prices, which contradicts the cost-of-carry model.
Why Option C is incorrect: If benefits exceed costs, the forward price would actually be lower, not higher. This situation creates backwardation where forward prices are below spot prices.
Example: For a commodity with storage costs:
$100$5$100 + $5 = $105 (higher due to costs)For a dividend-paying stock:
$100$3$100 - $3 = $97 (lower due to benefits)Ultimate access to all questions.
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Which of the following statements best describes the relationship between the net costs of carry and the forward price?
A
If the costs of carry exceed the benefits, the forward price would be lower
B
If the costs of carry exceed the benefits, the forward price would be higher
C
If the benefits exceed the costs of carry, the forward price would be higher