1. Suppose that oil is currently trading at $38 a barrel. Assume that the interest rate is 3% for all maturities and that oil has a convenience yield of c. If there are no other carry costs, for what values of c can the oil market be in backwardation?
2. A firm is given the following information on forward prices (gold and silver prices are per oz, copper prices are per lb):
Commodity: Spot / One-month / Two-month / Three-month / Six-month
Gold: 436.4 / 437.3 / 438.8 / 440.0 / 444.5
Silver: 7.096 / 7.125 / 7.077 / 7.160 / 7.220
Copper: 1.610 / 1.600 / 1.587 / 1.565 / 1.492
(a) Which of these markets are normal? inverted? neit
(b) Which are in backwardation? in contango?
(c) Which market appears prima facie to have the greatest convenience yield?
3. A firm is planning to enter into a long forward hedge to offset a short forward position. If the firm chooses a futures contract over a forward contract, do they want the correlation of the spot to futures to be higher or lower than that of the spot to forwards?
4. A firm enters into a long eurodollar futures contract at a price of 94.59 and exit the contract a week later at a price of 94.23. What is the firm’s dollar gain or loss on this position?