cost-of-carry

Learning objectives: Explain the formula for pricing commodity forwards. Describe an arbitrage transaction in commodity forwards and compute the potential arbitrage profit. Define the lease rate and explain how it determines the no-arbitrage values for commodity forwards and futures. Describe...

Interest rate parity applies the cost of carry (COC) model to enforce an equilibrium (indifference) between two choices: 1. translate the 1,000 EURs immediately at the spot FX rate, and subsequently grow them at the USD risk-free rate for two years; or 2. hold the 1,000 EURs, grow them at the...

The convenience yield an intangible benefit of commodity ownership. It is derived from (explained by) the observed forward/futures price. David's XLS is here: https://www.dropbox.com/s/orv4ljunme62kgl/062018-coc-convenience1.xlsx

In the cost of carry (COC) model, storage cost is treated like negative income. If we reduce the total storage cost over the life of the futures contract, given by (U), then the theoretical futures price is given by F(0) = [S(0) + U]*exp(rT). If we can represent storage cost as a constant...

The cost of carry model returns a theoretical forward price, which is based on the NET cost of ownership David's XLS is here: https://www.dropbox.com/s/8p762uz635zcvm5/060618-yt-coc-v2.xlsx

Learning objectives: Calculate, using the cost-of-carry model, forward prices where the underlying asset either does or does not have interim cash flows. Describe the various delivery options available in the futures markets and how they can influence futures prices. Explain the relationship...

Learning objectives: Calculate a forward foreign exchange rate using the interest rate parity relationship. Define income, storage costs, and convenience yield. Calculate the futures price on commodities incorporating income/storage costs and/or convenience yields. Questions: 717.1. Near the...

Learning objectives: Differentiate between investment and consumption assets. Define short-selling and calculate the net profit of a short sale of a dividend-paying stock. Describe the differences between forward and futures contracts and explain the relationship between forward and spot prices...