I’m just finishing the second mock exam included with the level two cirriculum. Morning session, block 7, question 6. Here is the relevent vignette and question/answer:
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I guess I thought I had a handle on this but … I thought that futures prices were not tied to expected future spot prices directly. Don’t we use CURRENT spot prices and then appropriate adjustments to account for time value of money and for carrying costs and convenience yields? Both buyer and seller of a future takes on risks so why would future prices be adjusted for a risk premium? … If futures prices are discounted for a risk premium, couldn’t one go short the asset and long the future to capture the “risk premium” without actually taking any risk? (Since they have already secured a price to buy back the asset to cover the short).