Commodity Forwards and Futures

  1. The spot price of corn is $5.85 per bushel. The opportunity cost of capital for an investor is 0.5% per month. If storage costs of $0.04 per bushel per month are factored in, all else being equal, what is the likely price of a 4-month forward contract?

A) $5.808

B) $5.736

C) $5.968

D) $6.006

Answer: A

I have calculated the future value of storage costs as follows: Future value of storage costs = 0.04 x (1/1.0053 + 1/1.0052 + 1/1.005 + 1) = 0.158809925. But I am unable to derive the answer A.

I have also encountered difficulty in solving the following question:

  1. Oil is selling at a spot price of $42.00 per barrel. Oil can be stored at a cost of $0.42 per barrel per month. The opportunity cost of capital is 7.2% per year (or 0.6% per month). What is the gain or loss realized by an oil refinery that floats its exposure and purchases oil on the spot market in 2 months at a price of $43.00 per barrel, instead of hedging with a forward contract?

A) $0.35 gain

B) $0.35 loss

C) $1.00 gain

D) $1.00 loss

Answer: A

Your help would be much appreciated!

I’m fairly certain this part of the exam has been eliminated… Where are you getting this question?