medium · FRM Part 1 Financial Markets and Products

Under the cost-of-carry framework with continuous compounding, which statement is correct?

1. The claim is false; the futures price equals S_0 e^(r+u-y)T, so if the convenience yield y exceeds the sum of the risk-free rate r and storage cost u, the market is in backwardation despite positive storage costs
2. The claim is true; positive storage costs u are simply added directly into the cost of carry, so F_0=S_0 e^(r+u)T>S_0 must always hold for any storable commodity regardless of the convenience yield's size
3. The claim is false, but only because storage costs mechanically reduce the futures price, so F_0=S_0 e^(r-u)T can fall well below spot whenever storage is sufficiently expensive relative to the prevailing risk-free rate
4. The claim is true in expectation under the risk-neutral pricing measure, since the convenience yield simply behaves like a dividend-type benefit that raises, rather than lowers, the effective cost of carry on the position being held

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