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Answer: Investment assets have a positive convenience yield in futures markets due to the optionality of liquid markets
The false statement is **B**. - **A is true**: storage costs enter the cost-of-carry model like a negative income yield. - **B is false**: convenience yield is a feature of **consumption commodities**, not investment assets. Investment assets do not typically have a convenience yield. - **C is true**: a higher lease rate acts like income from holding the metal and tends to reduce the forward price, contributing to backwardation ceteris paribus. - **D is true**: normal backwardation in a consumption commodity can arise from convenience yield and/or risk premia associated with systematic risk. So the incorrect proposition is **B**.
Author: Manit Arora
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Question-717.3. You are trying to model the theoretical forward price of silver using the cost of carry model. Your model is informed by the following four propositions. Each is correct except which is FALSE?
A
Storage costs can be treated as negative income in the cost of carry model
B
Investment assets have a positive convenience yield in futures markets due to the optionality of liquid markets
C
A positive (negative) lease rate tends to contribute to backwardation (contango) in the gold futures curve, ceteris paribus
D
Normal backwardation in a consumption commodity could be explained by some combination of non-zero convenience yield and/or systematic risk (i.e., positive beta) of the commodity
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