Answer: The market is concerned that a possible shortage (i.e., lack of supply) in wheat might occur and this is reflected in a convenience yield of about 4.0% per annum as a proportion of the spot price

### Analysis For a commodity futures contract, the cost-of-carry relationship is: \[ F_0 = S_0 e^{(r + u - y)T} \] where: - \(S_0 = 5.00\) - \(r = 3\%\) - \(u = 12\%\) storage cost - \(T = 0.75\) years - \(y\) = convenience yield If we ignore convenience yield, the theoretical futures price would be: \[ F_0 = 5.00 \times e^{(0.03 + 0.12)(0.75)} \approx 5.594 \] The observed futures price is **5.430**, which is lower than this. That suggests a **positive convenience yield**. Solving for the convenience yield gives approximately: \[ y \approx 4\%\text{ per annum} \] ### Correct answer **D) The market is concerned that a possible shortage in wheat might occur and this is reflected in a convenience yield of about 4.0% per annum as a proportion of the spot price**

Author: Manit Arora