Explanation:
Under the cost-of-carry model, the forward/futures price is driven by:
If storage is inexpensive, lease is small, and convenience yield is negligible, the net carry is still usually slightly positive and mainly influenced by the risk-free rate. That produces a gentle contango rather than a steep one.
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Question 188.3. Assume gold exhibits the following characteristics, consistent with McDonald: inexpensive to store (less than the risk free rate); earns a small lease rate (less than risk free rate); and bestows a negligible convenience yield (approximately zero). What is the most natural prediction of the gold futures curve according to the cost of carry model?
A
Gentle contango (at approximately the riskfree rate)
B
Gentle backwardation (at approximately the riskfree rate)
C
Steep contango (at approximately the riskfree rate plus lease plus convenience)
D
Steep backwardation (at approximately the riskfree rate plus lease plus convenience)