medium · FRM Part 1 Financial Markets and Products
If a consumption asset's futures price is observed to be significantly lower than the upper bound defined by S_0 e^(r+u)T, how is the difference interpreted in the cost-of-carry model?
- It indicates the market is in contango, futures priced above spot.
- As a positive convenience yield (y) reflecting the benefit of physical possession.
- It signals a risk-free arbitrage opportunity known as reverse cash-and-carry trading.
- It signals that storage costs for the physical commodity have turned negative.
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