By this time, you must have understood, contango market / backwardation market of futures. I have already explained what the components that are included or excluded in calculating the forward price.
Please complete the following exercise. Even if you cannot answer the questions, I will give you the answers in the next 24 hours.
Article
– 5: Quiz on Commodity forwards and Futures. (Robert McDonald)
A commodity trader
collected the following wheat futures prices from CME group on 15.04.2013: All
the prices are quoted in cents per bushel. Assume that risk free rate in terms
of Libor (London Interbank Offer Rate) is 4.25% for one year. The spot price of
wheat (cents per bushel) is 710 (cents / bushel).
|
May
2013
|
706.2
|
|
July
2013
|
710.6
|
|
Sep
2013
|
716.2
|
|
Dec
2013
|
729.4
|
|
Mar
2014
|
743.2
|
(Source: http://www.cmegroup.com/trading/agricultural/grain-and-oilseed/wheat_quotes_globex.html
[site accessed on 15.04.2013])
On the basis of the
above information, answer the following questions.
Q1A: The wheat futures market is called as: Contango/Backwardation/Flat
structure, explain your reasons.
Q1B: Assume that the trader entered into a short
forward contract and the trader is already holding the asset. If the asset does
not pay any dividends on the investment, but if the investor needs to spend on
storage cost, calculate the storage cost (in % terms) included in the March
futures price by the trader with short position?
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