Exam 6: The Wide World of Futures Contracts

When answering the questions below, refer to the following table of commodity forward and spot prices. The annual risk free interest rate is 4.0%. Expiration Pork Bellies Com Soybeans Today=spot 540 212 430 6 months 560 208 440 12 months 590 203 452 18 months 625 200 445 24 months 655 195 437 -What is the approximate annualized lease rate on the 12-month corn forward contract?

The lease rate on the 6-month soybean contract is 0.35%. What is the implied annual storage cost if the cost is continuously paid and proportional?

The spot price of corn is $2.60 per bushel. The opportunity cost of capital for an investor is 0.6% per month. If storage costs of $0.03 per bushel per month are factored in, all else being equal, what is the future value of storage costs over a 6-month period?

Give one example of how price discovery functions in the commodity futures market.

If the December HDD contract for Chicago is quoted as 994, what is the implied average HDD for the month of December?

What function does the convenience yield serve in setting forward prices and how does this influence arbitrage opportunities?

Which of the following terms most accurately describes the forward curve for soybeans over the next two years?

Explain how a negative correlation between agricultural production and commodity prices creates a natural hedge.

Why is the cash-and-carry strategy employed in the financial futures market not readily available in the commodity futures market?

Nine-month gold futures are trading for $306 per ounce. The spot price is $295 per ounce. LIBOR during each of the upcoming 4 quarters is listed as 1.04%, 1.22%, 1.30%, and 1.35%, respectively. Calculate the 9-month lease rate on the futures contract.

Given a lease rate of 7.0% on the 24-month corn forward contract, what is the approximate potential arbitrage profit per contract?

During one winter week, the city of Indianapolis had daily average Fahrenheit temperatures of 55, 45, 38, 48, 35, 50, and 42 degrees. What is the HDD for this week?

The 6-month futures price for oil is $21 per barrel (or 50 cents per gallon). The 6-month futures prices for gasoline and heating oil are 80 cents and 69 cents, respectively. What is the gross margin on a simple 3-2-1 crack spread?

The current currency spot rate is $1.31 per euro. If dollar denominated interest rates are 3.0% and euro denominated interest rates are 4.0%, what is the likely dollar per euro exchange rate for a 2-year forward contract?

The spot price of gasoline is 106 cents per gallon and the annualized risk free interest rate is 4.0%. Given a lease rate of 1.0%, a continuously paid storage rate of 0.5%, and a convenience yield of 0.75%, what is the no-arbitrage price range of a 1-year forward contract (in cents)?

Housing index and housing futures contracts attempt to track which of the following?

Oil is selling at a spot price of $42.00 per barrel. Oil can be stored at a cost of $0.42 per barrel per month. The opportunity cost of capital is 7.2% per year (or 0.6% per month). What is the gain or loss realized by an oil refinery that floats its exposure and purchases oil on the spot market in 2 months at a price of $43.00 per barrel, instead of hedging with a forward contract?

Which of the following is most likely to short a housing futures contract?

Explain the steps necessary to take advantage of an arbitrage opportunity, which may exist between the dollar and yen, when a future yen payment is required.

When answering the questions below, refer to the following table of commodity forward and spot prices. The annual risk free interest rate is 4.0%. Expiration Pork Bellies Com Soybeans Today=spot 540 212 430 6 months 560 208 440 12 months 590 203 452 18 months 625 200 445 24 months 655 195 437 -What is the approximate annualized lease rate on the 18-month soybean forward contract?