Answer: If the costs of carry exceed the benefits, the forward price would be higher

## 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: - **Net Cost of Carry = Costs - Benefits** - Costs include storage, insurance, financing costs - Benefits include dividends, convenience yield, etc. **Key Concept:** - When **costs exceed benefits** (net cost is positive), the forward price is **higher** than the spot price adjusted for time value. - When **benefits exceed costs** (net cost is negative), the forward price is **lower** than the spot price adjusted for time value. **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: - Spot price: $100 - Storage cost: $5 - No benefits - Forward price = $100 + $5 = $105 (higher due to costs) For a dividend-paying stock: - Spot price: $100 - Dividend benefit: $3 - No storage costs - Forward price = $100 - $3 = $97 (lower due to benefits)

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