Gold Futures - Practice Question (Par 4 difficulty)

[higaurav]

Hi David,

Ref Q: More difficult: Based on the June & Decmber futures prices, what is the implied six-month lease rate for gold, implied by the June and December futures prices (not the lease rate implied by the spot which interestingly is negative!)?

When we solve for this question we have not taken storage cost, and it makes sense as well because we are solving for two futures. I just wanted to confirm the concept, that when solving for futures (at two different dates) of a commodity, we should not take into consideration storage cost (and also convenience yield). Pls advice.

Rgrds,

OM

 

[David Harper CFA FRM]

Hi Om,

Right, it's a bit confusing due to the slight *difference* in terminology in Culp versus Hull. Generally, you should be told which to include/exclude (i.e., of storage, convenience, dividend/income). Specifically:

* Hull mainly introduces the distinction betwn consumption and investment commodities to make the point that consumption commodites will generally have storage costs but give no income; while investment commodities will perhaps given income but will not have storage costs. So, commodity type (investment vs. consumption) might be the first clue. Note Culp allows for either with gold: physical or synthetic. I'd say that generally it's okay to assume investment commodities have no storage costs.

* The convenience yield will need to be articulated b/c typically it is the residual (left over) that is solved for. For example, if given two futures prices, it's impossible to simultaneously solve for both storage and convenience (two unknowns and only one formula).

All in, the question will likely need to be specific about the components of cost of carry

David