medium · FRM Part 1 Financial Markets and Products
A commodity is currently trading at a spot price of 85. The6-month futures price is82.
Given a risk-free rate of 4% and storage costs of 2%, what does the 'backwardation' in this market primarily signify regarding the convenience yield?
- The convenience yield is zero, which is typical for pure investment assets like gold.
- The market is in contango, signifying ample supply and a low convenience yield here.
- The convenience yield is exactly equal to the storage cost, which fully neutralizes it here.
- The convenience yield is high, exceeding the sum of the risk-free rate and storage costs.
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