Under uncertainty and risk neutrality, today's spot price equals the expected future spot price minus the cost of storage and interest forgone.

Question

Quizplus · Accepted Answer

This statement is correct under the assumption of risk neutrality and uncertainty. The spot price today should equal the expected future spot price minus the cost of storage and any interest that could be earned on the cost of storage. This is because if the current spot price is higher than this expected future price plus storage costs and forgone interest, then one could buy the asset today, store it, and sell it in the future for a profit. Conversely, if the spot price is lower than this expected future price plus storage costs and forgone interest, then it would be better to wait and buy the asset in the future when it is cheaper.

Under Uncertainty and Risk Neutrality, Today's Spot Price Equals the Expected