Chartered Financial Analyst Level 2 test

24:00

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CFA Level 2 - Corporate Issuers - Corporate Restructuring

Intermediate

1/24

XYZ Inc. enters into a forward contract to purchase 4,000 units of a commodity in 6 months at a price of $150 per unit. The current spot price of the commodity is $140 per unit, the risk-free interest rate is 3% per annum, and the storage cost is $2 per unit per month. The commodity's convenience yield is estimated at 2% per annum. Using the cost of carry model for pricing forwards with convenience yield, what is the fair value of this forward contract?

$598,964.40

$594,161.60, derived by incorrectly applying the convenience yield to the spot price instead of the cost of carry in the pricing formula.

$603,816.00, calculated by considering the storage cost and risk-free interest rate but not accounting for the convenience yield in the pricing model.