CMFAS CM-SIP Derivatives — Futures & Forwards question: commodity's futures curve

CMFAS CM-SIPDerivatives — Futures & Forwards

A commodity's futures curve is in BACKWARDATION. This is MOST consistent with:

A a high convenience yield or tight near-term supply of the physical asset.
B high financing and storage costs on a storable asset that pays no income.
C the clearing house raising initial margin on the near-dated contract.
D a net cost of carry of exactly zero across all delivery months.

Show the answer and explanation

Answer: A. a high convenience yield or tight near-term supply of the physical asset.

Backwardation (futures below spot) typically reflects a high income/convenience yield or tight near-term supply, which lowers the forward relative to spot; high positive carry would instead produce contango.

Common mistake

Linking high storage/financing costs to backwardation when they push toward contango.

Practise more CM-SIP Derivatives — Futures & Forwards questions

Exam-style questions with worked answers, then full timed mocks. Free to start.

Start practising →

Study note: Derivatives — Futures & Forwards CMFAS CM-SIPpractice questions & mock exams

CMFAS CM-SIP Derivatives — Futures & Forwards question: commodity's futures curve

Answer: A. a high convenience yield or tight near-term supply of the physical asset.

Common mistake

Related CMFAS CM-SIP questions

CMFAS CM-SIP Derivatives — Futures & Forwards question: commodity's futures curve

Answer: A. a high convenience yield or tight near-term supply of the physical asset.

Common mistake

Related CMFAS CM-SIP questions