HI: I am reading notes book 4, page 156, the example for commodity forwards pricing. anyone find the forward and spot prices relationship wrong?? F(0,t)=S(0,t)E-®T ??? the negative sign would be there? I think it should be positive. correct me, thanks
If forward prices are greater than spot prices it is contango. If forward prices are less than spot prices it is backwardation. Forward price curves can be downward sloping. If convinience yield > ( risk free rate + transportation costs), then spot price > futures price. If convinience yield < ( risk free rate + transportation costs), then spot price < futures price. Hope this helps.
Please include storage costs along with transportation costs.
The sign is right. F(0,t)=S(t)E-®T Forward rate for time t delivery at time 0 = expected spot rate at time t discounted back on a continuous basis. Hope this helps.