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Answer: The market’s observed forward curve must match forward prices given by the cost of carry model; i.e., observed F(T) must equal S(0)*exp(cT), where (c) is cost of carry
**Correct answer: D** A commodity forward curve is the set of forward prices across maturities. Market participants can observe it, and it may be in **contango** or **backwardation**. - **A** is true: forward prices are observable in the market. - **B** is true: contango and backwardation describe the shape of the forward curve. - **C** is true: forward curves exist for financial, currency, and physical commodities. - **D** is false: the observed forward curve does **not necessarily** equal the simple cost-of-carry formula. In practice, convenience yield, storage costs, financing, and supply/demand conditions can cause deviations from a basic cost-of-carry relationship. Therefore, the exception is **D**.
Author: Manit Arora
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Question 186.1. EACH of the following is necessarily true about a commodity forward curve (a.k.a., forward strip) EXCEPT for:
A
Market participants can today observe, and roughly agree on, a commodity’s forward curve (or forward strip)
B
Contango and backwardation are properties (or characteristics) of a commodity forward curve
C
Investment (financial), currency and consumption commodities all exhibit forward curves
D
The market’s observed forward curve must match forward prices given by the cost of carry model; i.e., observed F(T) must equal S(0)*exp(cT), where (c) is cost of carry
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