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?

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BlackTom AI · Accepted Answer

Let's restate the problem to set the stage: the current gold price is $2000 per ounce, the one-year forward price is $2100, and storage costs for gold rise while the current spot price remains at $2000. The question asks how the one-year forward price is expected to adjust in response to higher storage costs.

Option 1: Not enough information. This is not correct because forward pricing for a commodity with storage costs typically depends on the spot price, the interest rate, and the cost of storing the commodity. If storage costs rise, all else equal, the forward price should reflect those higher carrying costs, so we do have information to make a directional inference.

Option 2: Lower than $2100. This would imply that higher storage costs reduce the forward price. In standard forward pricing, higher storage costs raise the cost of carrying the commodity forward, which pushes the forward price up, not down. Therefore this option contradicts the basic relationship between storage costs and forward pricing.

Option 3: Higher than $2100. This aligns with the intuition that forward prices incorporate the carrying (storage) costs of holding the asset until the forward maturity. If storage costs rise, the total cost of owning and delivering the asset at the forward date increases, which tends to lift the forward price above the current forward level of $2100.

Option 4: Same as $2100. Keeping the forward price exactly at $2100 would ignore the increased carrying costs. Since forward pricing generally increases with higher storage costs (assuming interest rates and other factors stay the same), this option is unlikely.

In summary, the key concept is that forward prices for commodities incorporate the cost of carrying the asset—including storage. When storage costs rise while the spot price remains fixed, the forward price should rise to reflect the higher cost of holding the asset until delivery in the forward period. This makes Option 3 the correct directional expectation, while the other options misstate the effect of higher storage costs on forward pricing.

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