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Answer: Contango and normal backwardation
- **Positive storage cost** and **no convenience yield** imply that the cost of carry is positive, so the forward curve is most likely in **contango**. - **Positive systematic risk (beta > 0)** implies a positive risk premium for holding the commodity. In Hull’s framework, this tends to make the futures price **below** the expected future spot price, which is **normal backwardation**. Therefore, the observed curve is **contango**, and the relationship between futures price and expected future spot price is **normal backwardation**. Correct answer: **B**.
Author: Manit Arora
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Question-167.3. Assume that corn has the following properties: positive storage cost, no convenience yield, and positive systemic risk (i.e., beta > 0). According to Hull, which is most likely with respect to, respectively, the observed forward curve (contango = normal; backwardation = inverted) and the relationship between the futures price, , and the expected future spot price, ?
A
Contango and normal contango
B
Contango and normal backwardation
C
Backwardation and normal contango
D
Backwardation and normal backwardation
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