Question

1a) A commodity’s spot price as of December 31 is $50/unit, and storage costs are $1.00/unit at the end of every month, starting January 31. If the effective monthly interest rate is 0.7% (compounded monthly, not continuously), what will be the forward price for delivery at the end of July, assuming the commodity is stored?

Answers: a. $59.85 b. $59.65 c. $59.50 d. $59.77 e. $57.15

1b) The average daily temperatures over one week (in degrees Fahrenheit) are 71, 66, 69, 71, 67, 61, and 79. What are the cooling degree-days (CDDs) for this week?

Answers: a. 33 b. 29 c. 37 d. 4 e. 0

Please show me how to solve these with proper formulas. Thank you!

Answer 1

Forward Price for 1st month = (50+1)*1.007 = 51.36

Forward Price for 2nd month=  (51.36+1)*1.007 = 52.72

Forward Price for 3rd month =  (52.72+1)*1.007 = 54.10

Forward Price for 4th month =  (54.10+1)*1.007 = 55.49

Forward Price for 5th month =  (55.49+1)*1.007 = 56.88

Forward Price for 6th month =  (56.88+1)*1.007 = 58.29

Forward Price for 7th month =  (58.29+1)*1.007 = 59.70

A cooling degree day is nothing but how many degress the day's average is above 65^o Fahrenheit. So to calculate CCD, we need to subtract 65 from the days average. If average is less than 65, then it is 0.

Daily average temp = 71, 66, 69, 71, 67, 61, 79

CCD = Subtract 65 from all the values and add the resultant

CCDs = 6+1+4+6+2+0+14 =33