Question

YOX- -12) - N-12- * S. The table Table for N(x) When x 50 w --.12) -NE-191 ith - Answer questions 5 and 6 based on the following informatio mation. eeeeee A, B, and are three non-cyclical commodities traded on a fi exchange. On April 1, the settlement prices of their June and futures contracts are given as: I AL B JUNE 100 200 106 on a futures ne and December DECEMBER 196 5. Given the above price information, which of these commodities con possibly have a positive convenience value? a. Only A. 1 Use the Por e le. NO.6278) - N0.62) This while shows was of NG) for 20. The thir able for N(x) When x с 500 526 073 b. Only B. c. Only C. d. A, B, and C. e. None of them. 6. If the 6-month June-December T-Bill rate is 5 %, (i.e. 10%/2) and the 6- month storage costs for A, B and Care $1, $2 & $3 respectively, the convenience values for A, B and C respectively are: a. 0.0.0 b.2.2.2 c. 0, 0, -2 d. 0,0,2 e. None of the above. 7. We talked about a hedger trying to reduce "inventory" risk by shorting a futures contract. Which of the following is not a valid reason as to why he did not eliminate this inventory risk by simply selling the commodity in the spot market instead of hedging? a. He does not have the commodity in his possession. b. He has liquidity problems in the cash market. c. He believes the cash market price will increase. d. He has high transaction costs in the spot market. e. All of the above are valid reasons. COPPER The answers to coll wer questions 1, 2, 3, and 4 based on you

Answer 1

IF ANY QUERY, FEEL FREE TO ASK Solution Future price of commodity A and B is greater by 6%. Hence if Commodity C has future price less than 6%, then it has a positive convenience value. Commodity C calculation:- Future price = 500 x (1 + 6%) 530 Hence, option c. Only C is correct as future price is 526, which is less than 530. 6 We know that, = Spot price x (1 + interest rate) + storage cost - Convenience Value Future Value Hence, Convenience Value = Spot price x (1 + interest rate) + storage cost - Future Value Hence, Convenience Value A = 100x (1+5%) + 1 - 106 = 0 Convenience Value B = 200 X (1+5%) + 2 - 212 Convenience Value C = 500 x (1+5%) + 3 - 526 = Hence, Option d. 0, 0, 2 is correct. A Trader may Sell Future contract of a commodity if Trader does not have commodity or the is 7 liquidity problem in cash market or believes cash market price will increase or there is high transaction cost in spot market. Hence, Option e. all of the above is correct.