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 an investment asset, meaning its price is driven by the risk-free rate alone, causing backwardation.
- Gold's contango is caused by its high convenience yield during periods of market stress.
- The storage costs for Oil are significantly lower than for Gold, pushing the Oil curve 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.
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