Explanation:
The forward price formula for an asset with storage costs and convenience yield is:
F = S × e^{(r + c - y)T}
Where:
From this formula, we can see:
Storage costs (c): An increase in storage costs increases the forward price because holding the physical asset becomes more expensive, making the forward contract more valuable.
Interest earned (r): An increase in the risk-free interest rate also increases the forward price, as the cost of financing the position increases.
Convenience yield (y): An increase in convenience yield decreases the forward price, as holding the physical asset provides benefits (like avoiding stockouts or having immediate availability) that make the forward contract less valuable.
Therefore, among the given options:
Key Concept: Forward pricing is based on the cost-of-carry model, where forward price equals spot price plus carrying costs (interest, storage) minus benefits (income, convenience yield).
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The forward price on an underlying asset will increase with an increase in:
A
storage costs of the underlying asset.
B
interest earned on the underlying asset.
C
convenience yield of the underlying asset.