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CFA Level 2 - Economics
Intermediate
1/45
UVW Corp. enters into a forward contract to sell 3,000 units of a commodity in 4 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 6% per annum, and the storage cost is $2.50 per unit per month. The commodity's price volatility is estimated at 20%. The convenience yield is estimated at 4% per annum. Using the cost of carry model for pricing forwards with convenience yield, what is the fair value of this forward contract?
a.
$438,600, taking into account only the spot price, risk-free rate, and time to maturity in the forward pricing formula, while neglecting the storage cost and convenience yield
b.
$455,400, incorporating the spot price, risk-free rate, storage cost, time to maturity, convenience yield, and the commodity's price volatility in the Black's model for pricing forwards
c.
$447,900, considering the spot price, risk-free rate, storage cost, time to maturity, and convenience yield in the cost of carry model
Intermediate