medium · FRM Part 1 Financial Markets and Products
An analyst observes that Crude Oil is in backwardation while Gold is in contango. Both have similar storage costs as a percentage of value.
Which statement best explains this difference through the lens of investment vs. consumption assets?
- Oil is treated here as a pure investment asset, meaning its price is driven only by the risk-free rate, and this alone explains its backwardation.
- Gold's contango is actually caused by an unusually high convenience yield that tends to spike sharply during any period of acute stress.
- The storage costs for Oil are significantly lower than those for Gold as a percentage of value, and this cost gap alone pushes Oil into backwardation.
- Gold has a convenience yield near zero because it is an investment asset, whereas Oil has a high convenience yield due to its consumption value.
Sign up free to see the explanation and track your rank →
More FRM Part 1 Financial Markets and Products practice
- If the oil market shifts from backwardation to a persistent contango, which of the followi
- If at the time of delivery S_1 = $72 and F_1 = $74, while the hedge was entered at F_0 =
- A trader creates an iron condor by selling a 90 put, buying… — What is the maximum loss fo
- An American put option is deep in the money. Why might it be optimal to exercise this opti
- The variation margin is the cash amount that is:
- What is the maximum possible loss for an investor who writes (shorts) a naked call option?
- If the standard deviation of futures price changes (σ_F) is much larger than the standard
- Which exotic option would a speculator use if they believe a stock will experience a massi