medium · FRM Part 1 Financial Markets and Products
A trader holds a long position in a deferred-delivery forward on a commodity that exhibits a positive convenience yield. The forward curve is in mild backwardation. Storage costs are continuous and proportional, and the financing rate exceeds the convenience yield net of storage.
If the convenience yield suddenly rises (holding the spot price, financing rate, and storage cost fixed), what happens to the no-arbitrage forward price and to the existing long forward's mark-to-market value?
- The forward price falls and the long forward position loses value, because a higher convenience yield lowers the net cost of carry
- The forward price rises and the long forward position gains value, because convenience yield raises the cost of holding the deliverable
- The forward price falls and the long forward position gains value, because cheaper carry makes deferred delivery relatively more attractive
- The forward price rises and the long forward position loses value, because backwardation deepens against the holder
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