medium · FRM Part 1

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?

1. As an indication that the market is in contango.
2. As a positive convenience yield (y) reflecting the benefit of physical possession.
3. As a risk-free arbitrage opportunity known as reverse cash-and-carry.
4. As a signal that storage costs are actually negative.

Sign up free to see the explanation and track your rank →