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