Table 6.1 $\begin{array}{lccc} \begin{array}{c} \text { Expiration } \\ \text { Time } \end{array} & \begin{array}{c} \text { Wheat } \\ \text { Cents/Bushel } \end{array} & \begin{array}{c} \text { Corn } \\ \text { Cents/Bushel } \end{array} & \begin{array}{c} \text { Soybeans } \\ \text { Cents/Bushel } \end{array} \\ \hline \text { Today }=\text { spot } & 540 & 610 & 1320 \\ 6 \text { months } & 560 & 600 & 1350 \\ 12 \text { months } & 590 & 587 & 1480 \\ 18 \text { months } & 625 & 580 & 1370 \\ 24 \text { months } & 655 & 570 & 1265 \end{array}$ -Refer to the table 6.1.Given a lease rate of 7.0% on the 24-month corn forward contract,what is the approximate potential arbitrage profit per contract?

A) 3.68 cents B) 4.48 cents C) 5.84 cents D) 6.90 cents A) 3.68 cents B) 4.48 cents C) 5.84 cents D) 6.90 cents B

Table 6.1 $\begin{array}{lccc} \begin{array}{c} \text { Expiration } \\ \text { Time } \end{array} & \begin{array}{c} \text { Wheat } \\ \text { Cents/Bushel } \end{array} & \begin{array}{c} \text { Corn } \\ \text { Cents/Bushel } \end{array} & \begin{array}{c} \text { Soybeans } \\ \text { Cents/Bushel } \end{array} \\ \hline \text { Today }=\text { spot } & 540 & 610 & 1320 \\ 6 \text { months } & 560 & 600 & 1350 \\ 12 \text { months } & 590 & 587 & 1480 \\ 18 \text { months } & 625 & 580 & 1370 \\ 24 \text { months } & 655 & 570 & 1265 \end{array}$ -Refer to the table 6.1.What is the approximate annualized lease rate on the 12-month corn forward contract?

A) 0.00% B) 2.25% C) 3.92% D) 7.84% A) 0.00% B) 2.25% C) 3.92% D) 7.84%

Table 6.1 $\begin{array}{lccc} \begin{array}{c} \text { Expiration } \\ \text { Time } \end{array} & \begin{array}{c} \text { Wheat } \\ \text { Cents/Bushel } \end{array} & \begin{array}{c} \text { Corn } \\ \text { Cents/Bushel } \end{array} & \begin{array}{c} \text { Soybeans } \\ \text { Cents/Bushel } \end{array} \\ \hline \text { Today }=\text { spot } & 540 & 610 & 1320 \\ 6 \text { months } & 560 & 600 & 1350 \\ 12 \text { months } & 590 & 587 & 1480 \\ 18 \text { months } & 625 & 580 & 1370 \\ 24 \text { months } & 655 & 570 & 1265 \end{array}$ -Refer to the table 6.1.What is the approximate annualized lease rate on the 18-month soybean forward contract?

A) 0.69% B) 1.52% C) 2.69% D) 3.31% A) 0.69% B) 1.52% C) 2.69% D) 3.31%

Table 6.1 $\begin{array}{lccc} \begin{array}{c} \text { Expiration } \\ \text { Time } \end{array} & \begin{array}{c} \text { Wheat } \\ \text { Cents/Bushel } \end{array} & \begin{array}{c} \text { Corn } \\ \text { Cents/Bushel } \end{array} & \begin{array}{c} \text { Soybeans } \\ \text { Cents/Bushel } \end{array} \\ \hline \text { Today }=\text { spot } & 540 & 610 & 1320 \\ 6 \text { months } & 560 & 600 & 1350 \\ 12 \text { months } & 590 & 587 & 1480 \\ 18 \text { months } & 625 & 580 & 1370 \\ 24 \text { months } & 655 & 570 & 1265 \end{array}$ -Refer to the table 6.1.If wheat farmers expect a return of 8.0% on their investment in wheat,what is the approximate implied increase in wheat commodity prices over the next 6 months?

A) 3.75% B) 4.59% C) 5.26% D) 6.37% A) 3.75% B) 4.59% C) 5.26% D) 6.37%

Table 6.1 $\begin{array}{lccc} \begin{array}{c} \text { Expiration } \\ \text { Time } \end{array} & \begin{array}{c} \text { Wheat } \\ \text { Cents/Bushel } \end{array} & \begin{array}{c} \text { Corn } \\ \text { Cents/Bushel } \end{array} & \begin{array}{c} \text { Soybeans } \\ \text { Cents/Bushel } \end{array} \\ \hline \text { Today }=\text { spot } & 540 & 610 & 1320 \\ 6 \text { months } & 560 & 600 & 1350 \\ 12 \text { months } & 590 & 587 & 1480 \\ 18 \text { months } & 625 & 580 & 1370 \\ 24 \text { months } & 655 & 570 & 1265 \end{array}$ -Refer to the table 6.1.Which of the following terms most accurately describes the forward curve for soybeans over the next two years?

A) Contango B) Backwardation C) Contango and backwardation D) None of the above A) Contango B) Backwardation C) Contango and backwardation D) None of the above

Table 6.1 $\begin{array}{lccc} \begin{array}{c} \text { Expiration } \\ \text { Time } \end{array} & \begin{array}{c} \text { Wheat } \\ \text { Cents/Bushel } \end{array} & \begin{array}{c} \text { Corn } \\ \text { Cents/Bushel } \end{array} & \begin{array}{c} \text { Soybeans } \\ \text { Cents/Bushel } \end{array} \\ \hline \text { Today }=\text { spot } & 540 & 610 & 1320 \\ 6 \text { months } & 560 & 600 & 1350 \\ 12 \text { months } & 590 & 587 & 1480 \\ 18 \text { months } & 625 & 580 & 1370 \\ 24 \text { months } & 655 & 570 & 1265 \end{array}$ -Refer to the table 6.1.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?

A) 0.84% B) 1.62% C) 2.30% D) 4.0% A) 0.84% B) 1.62% C) 2.30% D) 4.0%

Exam 6: Commodity Forwards and Futures

A review of seasonality forward curves may lead students to adopt a technical analysis mentality.Ask students to explain why such ideas may pop into their heads.Proceed to inquire as to why the curves have the appearances they do.An actual numerical example may be in order.If any still hold fast to their technical roots,insist that they show the profit numerically after considering all storage and other costs.

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Question 1

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It is possible that students may adopt a technical analysis mentality when reviewing seasonality forward curves because they may see patterns and trends in the data that align with technical analysis principles. Technical analysis involves using historical price and volume data to predict future price movements, and seasonality forward curves can display historical price movements over different time periods, which may lead students to apply technical analysis concepts to the data.

The appearance of seasonality forward curves can be influenced by a variety of factors, including supply and demand dynamics, production and consumption patterns, and market expectations. For example, a numerical example could be the forward curve for natural gas, which may show higher prices during the winter months due to increased demand for heating, and lower prices during the summer months when demand is lower.

If students still hold fast to their technical analysis roots, it is important to insist that they show the profit numerically after considering all storage and other costs. This is because technical analysis alone may not account for all the factors that can impact profitability, such as storage costs, transportation costs, and market fundamentals. By considering these additional costs, students can gain a more comprehensive understanding of the potential profitability of trading based on seasonality forward curves.

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?

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Question 2

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A

Table 6.1 Expiration Time Wheat Cents/Bushel Corn Cents/Bushel Soybeans Cents/Bushel Today = spot 540 610 1320 6 months 560 600 1350 12 months 590 587 1480 18 months 625 580 1370 24 months 655 570 1265 -Refer to the table 6.1.Given a lease rate of 7.0% on the 24-month corn forward contract,what is the approximate potential arbitrage profit per contract?

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Question 3

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B

Table 6.1 Expiration Time Wheat Cents/Bushel Corn Cents/Bushel Soybeans Cents/Bushel Today = spot 540 610 1320 6 months 560 600 1350 12 months 590 587 1480 18 months 625 580 1370 24 months 655 570 1265 -Refer to the table 6.1.What is the approximate annualized lease rate on the 12-month corn forward contract?

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Question 4

Nine-month gold futures are trading for $1565 per ounce.The spot price is $1509 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.

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Question 5

The spot price of gasoline is 258 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)?

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Question 6

When is it possible for the lease rate to fall below zero?

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Question 7

The spot price of corn is $5.85 per bushel.The opportunity cost of capital for an investor is 0.5% per month.If storage costs of $0.04 per bushel per month are factored in,all else being equal,what is the likely price of a 4-month forward contract?

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Question 8

The spot price of corn is $5.82 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?

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Question 9

Table 6.1 Expiration Time Wheat Cents/Bushel Corn Cents/Bushel Soybeans Cents/Bushel Today = spot 540 610 1320 6 months 560 600 1350 12 months 590 587 1480 18 months 625 580 1370 24 months 655 570 1265 -Refer to the table 6.1.What is the approximate annualized lease rate on the 18-month soybean forward contract?

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Question 10

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

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Question 11

Table 6.1 Expiration Time Wheat Cents/Bushel Corn Cents/Bushel Soybeans Cents/Bushel Today = spot 540 610 1320 6 months 560 600 1350 12 months 590 587 1480 18 months 625 580 1370 24 months 655 570 1265 -Refer to the table 6.1.If wheat farmers expect a return of 8.0% on their investment in wheat,what is the approximate implied increase in wheat commodity prices over the next 6 months?

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Question 12

The 6-month futures price for oil is $96.60 per barrel (or 2.30 cents per gallon).The 6-month futures prices for gasoline and heating oil are 2.50 cents and 2.15 cents,respectively.What is the gross margin on a simple 3-2-1 crack spread?

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Question 13

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

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Question 14

Table 6.1 Expiration Time Wheat Cents/Bushel Corn Cents/Bushel Soybeans Cents/Bushel Today = spot 540 610 1320 6 months 560 600 1350 12 months 590 587 1480 18 months 625 580 1370 24 months 655 570 1265 -Refer to the table 6.1.Which of the following terms most accurately describes the forward curve for soybeans over the next two years?

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Question 15

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

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Question 16

Table 6.1 Expiration Time Wheat Cents/Bushel Corn Cents/Bushel Soybeans Cents/Bushel Today = spot 540 610 1320 6 months 560 600 1350 12 months 590 587 1480 18 months 625 580 1370 24 months 655 570 1265 -Refer to the table 6.1.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?

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Question 17

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

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Question 18

Forward prices for gold,in dollars per ounce,for the next five years are 1350,1400,1560,1675,and 1756,respectively.A mine can be opened for 3 years at a cost of $2,000.Annual mining costs are a constant $500 and interest rates are 5.0%.When should the mine be opened to maximize NPV?

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Question 19

Nine-month gold futures are trading for $1565 per ounce.The spot price is $1509 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.

The spot price of gasoline is 258 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)?

When is it possible for the lease rate to fall below zero?

The spot price of corn is $5.85 per bushel.The opportunity cost of capital for an investor is 0.5% per month.If storage costs of $0.04 per bushel per month are factored in,all else being equal,what is the likely price of a 4-month forward contract?

The spot price of corn is $5.82 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?

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

The 6-month futures price for oil is $96.60 per barrel (or 2.30 cents per gallon).The 6-month futures prices for gasoline and heating oil are 2.50 cents and 2.15 cents,respectively.What is the gross margin on a simple 3-2-1 crack spread?

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

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

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

Forward prices for gold,in dollars per ounce,for the next five years are 1350,1400,1560,1675,and 1756,respectively.A mine can be opened for 3 years at a cost of $2,000.Annual mining costs are a constant $500 and interest rates are 5.0%.When should the mine be opened to maximize NPV?

Introduction to Derivatives

An Introduction to Forwards and Options

Insurance, collars, and Other Strategies

Introduction to Risk Management

Financial Forwards and Futures

Interest Rate Forwards and Futures

Swaps

Parity and Other Option Relationships

Binomial Option Pricing: Basic Concepts

Binomial Option Pricing: Selected Topics

The Black-Scholes Formula

Market-Making and Delta-Hedging

Exotic Options: I

Financial Engineering and Security Design

Corporate Applications

Real Options

The Lognormal Distribution

Monte Carlo Valuation

Brownian Motion and Itos Lemma

The Black-Scholes-Merton Equation

Risk-Neutral and Martingale Pricing

Exotic Options: 2

Volatility

Interest Rate and Bond Derivatives

Value at Risk

Credit Risk

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