Practice Question Set: Commodity Forwards and Futures

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Chapter 11. Commodity Forwards and Futures Practice Question set contains 11 pages covering the following learning objectives:

* Explain the key differences between commodities and financial assets.

* Define and apply commodity concepts such as storage costs, carry markets, lease rate, and convenience yield.

* Identify factors that impact prices on agricultural commodities, metals, energy, and weather derivatives.

* Explain the basic equilibrium formula for pricing commodity forwards.

* Describe an arbitrage transaction in commodity forwards, and compute the potential arbitrage profit.

* Define the lease rate and explain how it determines the no-arbitrage values for commodity forwards and futures.

* Describe the cost of carry model and illustrate the impact of storage costs and convenience yields on commodity forward prices and no-arbitrage bounds.

* Compute the forward price of a commodity with storage costs.

* Compare the lease rate with the convenience yield.

* Explain how to create a synthetic commodity position, and use it to explain the relationship between the forward price and the expected future spot price.

* Explain the relationship between current futures prices and expected future spot prices, including the impact of systematic and nonsystematic risk.

* Define and interpret normal backwardation and contango.

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