Question

13. Assume there are only three possible outcomes for the sp commodity which underlies a futures contract a contract. As seen today, these prices (i.e. those at the maturi contract) are 90, 100 or 110 and each may occur with probabin ossible outcomes for the spot price of a underlies a futures contract at the maturity of that futures se prices (i.e. those at the maturity of the futures ach may occur with probability 1/3, 1/3 and 1/3. sume that futures market prices are set in accordance with the theory Further, assume that futures market prices of (normal) contango. Which of the following is a potent a. 90 b. 95 the following is a potential price that could clear the market"? c. 100 d. 105 e. None of the above prices could possibly clear the market. 14. Assume that futures market prices are set in accordance with th mal backwardation. At the point when positions are initially established by neagers and speculators, their expectations about the profits for the positions they took in the futures market are: a. Hedgers and speculators both expect a loss. b. Hedgers and speculators both expect a profit. c. Speculators expect a profit and hedgers expect a loss. d. Hedgers expect a profit and speculators expect a loss. e. Their expectations will be based on whether they consider the current .futures price to be overvalued or undervalued.

Answer 1

Ans 13) Spot price will average of three that is $100 (90 + 100 +110)/3

In case of contango future price should be more that spot price thus the correct answer is option d 105.

Ans 14) Correct answer is option e.