If the present value of storage costs exceeds the present value of its convenience yield, then the commodity’s forward price is most likely:

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BlackTom AI · Accepted Answer

To analyze forward prices for commodities, we use the cost-of-carry framework, which expresses the forward price as F = S0 × e^{(r + storage costs − convenience yield) × T} for a non-dividend asset with storage costs and convenience yield considered.
Option 1: 'Higher than the spot price compounded at the risk-free rate.' If the present value of storage costs exceeds the present value of the convenience yield, the net carry cost (storage minus convenience yield) is positive. This pushes the forward price above the spot price grown at the risk-free rate, so F > S0 × e^{rT}. This aligns with the cost-of-carry intuition.
Option 2: 'The same as the spot price compounded at the risk-free rate.' This would imply zero net carry cost (storage costs equal convenience yield), which contradicts the given condition that PV storage costs exceed PV convenience yield, implying a positive carry.
Option 3: 'Less than the spot price compounded at the risk-free rate.' A positive net carry cost would raise, not lower, the forward price relative to the risk-free compounding of the spot. Therefore this option is inconsistent with positive carry.
In summary, when storage costs exceed convenience yield in present value terms, the forward price tends to lie above the risk-free-accumulated spot, reflecting a positive cost of carrying the commodity until delivery.

BU.232.710.W1.SP25 Final Exam

If the present value of storage costs exceeds the present value of its convenience yield, then the commodity’s forward price is most likely:

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