Consider the scenario where the current price of gold is $2000 per ounce, with the one-year forward price at $2100. Now, consider that the cost associated with storing gold rises, while the current price of gold remains unchanged at $2000. Under these circumstances, how is the one-year forward price expected to adjust?

Question

BlackTom AI · Accepted Answer

In a standard cost-of-carry framework, the one-year forward price F is driven by the spot price S plus the costs of carrying the asset (storage, financing, insurance, etc.) minus any income or convenience benefits. Here, S = 2000 and the current forward price is 2100, implying a carry cost component of about 100 over the year.

Option 1: Higher than 2100. If the storage cost increases while all else remains equal, the total carry cost rises. Since the forward price incorporates these carry costs, F should rise above 2100 to reflect the greater cost of holding the gold for the year. This option aligns with the cost-of-carry relationship.

Option 2: Lower than 2100. A higher storage cost would not push the forward price down; it increases the cost of holding the asset, which, all else equal, raises the forward price. This makes this option inconsistent with the scenario described.

Option 3: Same as 2100. Keeping everything else constant except storage cost would imply an unchanged carry cost, which contradicts the premise that storage costs rise. Therefore, this option ignores the effect of the increased carry cost.

Option 4: Not enough information. Given the basic forward pricing relationship and the explicit change in storage costs, there is enough information to infer the direction of the forward adjustment. The rise in storage costs provides a clear signal that the forward price should increase.

Overall, the reasoning supports that the forward price should move higher than 2100 when storage costs rise, reflecting the higher cost of carrying the gold over the period.

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