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Answer: Convenience yield of consumption commodities constrains arbitrageurs such that futures price cannot be calculated from spot price and observed variables
For **consumption commodities**, the key feature is the **convenience yield**—the non-monetary benefit of physically holding the asset. Because convenience yield is not directly observable, it can limit straightforward arbitrage and makes pricing different from investment assets. For **investment commodities**, futures prices are generally determined from observable spot price and carry variables such as financing cost and income yield. So the best answer is **B**.
Author: Manit Arora
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Q-164.2. According to Hull, with respect to futures price and the cost of carry model, what is a key DIFFERENCE between a consumption commodity (e.g., oil) and an investment commodity (e.g., Treasury bonds)?
A
Storage cost of consumption commodities constrains arbitrageurs such that futures price cannot be calculated from spot price and observed variables
B
Convenience yield of consumption commodities constrains arbitrageurs such that futures price cannot be calculated from spot price and observed variables
C
The financing cost of investment commodity implies a higher futures price (for the investment commodity) than for a consumption commodity, all other things being equal
D
There is no material difference with respect to futures prices as both commodities are variously exposed to the four factors: financing cost, storage, income (dividend), and convenience
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