A commodity has a spot price of $25 and a one-month forward price of $25.02.The one-month risk-free rate is 2% in continuously compounded and annualized terms.Assuming no other costs or benefits of carry on the commodity,what must be the lower bound on the convenience yield that prevents arbitrage?
A)0%
B)1%
C)2%
D)3%

Question

Quizplus · Accepted Answer

The convenience yield must be at least 1% to prevent arbitrage. The forward price should equal the spot price times the exponential of the risk-free rate minus the convenience yield. Solving for the convenience yield gives approximately 1%.

A Commodity Has a Spot Price of $25 and a One-Month