Explanation:
The forward price of livestock will be lower than the spot price of livestock. This is because the convenience yield is greater than the storage cost and risk-free rate. This relation can be demonstrated with this equation.
Since the convenience yield is greater than the sum of storage cost and the risk-free rate, the net effect will be negative, and the forward price will be lower than the spot price.
Q.821 An analyst is analyzing the effect of storage costs and convenience yields on the forward prices of livestock. The storage cost of the livestock is 1.3%, and the convenience yield is 2.9%. Evaluate the final impact on the forward price of livestock if the risk-free rate is 1.4%.
A
The forward price of livestock will be greater than the spot price of livestock.
B
The forward price of livestock will be lower than the spot price of livestock.
C
The forward price of livestock will be equal to the spot price of livestock.
D
The forward price of livestock cannot be ascertained.
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