Question

Multiple question

Consider a futures contract for corn with 1 year to maturity. If it is expected that the inventory of corn (for the entire corn industry) is likely to increase over the next 12 months

a)None of these answers.

b)the cost of carry model will no longer be a viable futures pricing model.

c)corn convenience yields will increase. corn convenience yields will decrease.

d)corn futures prices will become more volatile.

Answer 1

Cost of storage increases the future value of the forward contract. As entering into futures contract you don't have to incur storage cost which inturn increases the storage cost.

Convenience yield is the benefit from holding the stock. As in futures you wont be holding the stock to claim the convenience benefits, that reduces the future price of the stock.

We observe that storage of corn is likely to increase over the period of 12 months. That means forward price is expected to go up during 12 months. Cost of carry would still be viable to value futures.

Convenience yield will have no impact due to storage.

Corn futures are likely to move up, As storage cost is expected to go up. Futures would have been volatile had the storage cost was expected to be volatile. Storage cost are expected to increase and not volatile.

Correct option A. None of the answers.