Question

Answer questions S and 6 based on the following information. A, B, and C are three non-cyclical commodities traded on a futures exchange. On April 1, the settlement prices of their June and December 500 526 200 100 JUNE 212 106 DECEMBER Given the above price information, which of these commodities could possibly have a positive convenience value? a. Only A. b. Only B c. Only C d. A, B, and C. e. None of them. 5. 6. If the 6-month June-December T-Bill rate is 5 %, (ie, 10%/ 2) and the 6- month storage costs for A, B and C are $1, S2 & $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.

Answer 1

Q - 5

For A and B, December price is 6% more than the June price. This gives us an indication that if C's December price is not 6% more than June's price then it may have a positive convenience value. And this indeed is the case. Hence the correct answer is option c. Only C.

Q - 6

A's December price =106 = June Price x (1 + 5%) + 1 - Convenience value = 100 x (1 + 5%) + 1 - Convenience value

Hence, convenience value for A = 0

B's December price = 212 = June Price x (1 + 5%) + 2 - Convenience value = 200 x (1 + 5%) + 2 - Convenience value

Hence, convenience value for B = 0

C's December price = 526 = June Price x (1 + 5%) + 3 - Convenience value = 500 x (1 + 5%) + 3 - Convenience value

Hence, convenience value for C = 2

Hence, the correct answer is option d. 0, 0, 2

Q - 7

The correct answer si the last option e. All of them are the valid reasons.