3.2 - Commodity Forward Pricing

Question 1

Cost of Carry

Answer 1

F(T) = S + carrying costs

Question 2

Forward Pricing

Answer 2

F(T) = S * e^([r+c-y] * T)

r = risk free rate
c = storage costs
y= convenience yield

Question 3

Basis (forward contracts)

Answer 3

Basis = S - F(T)

Question 4

Calendar Spread

Answer 4

Calendar spread F(T+t) - F(T)

Question 5

Contango

Answer 5

Forward prices above the spot price, converge to the spot price over time

Question 6

Backwardation

Answer 6

Forward prices less than the current spot price