Economics Homework Help

1. Suppose that oil is currently trading at $38 a barrel. Assume that the interest rate is 3% for all maturities and that oil has a convenience yield of c. If there are no other carry costs, for what values of c can the oil market be in backwardation?

2. A firm is given the following information on forward prices (gold and silver prices are per oz, copper prices are per lb):

Commodity: Spot / One-month / Two-month / Three-month / Six-month

Gold: 436.4 / 437.3 / 438.8 / 440.0 / 444.5

Silver: 7.096 / 7.125 / 7.077 / 7.160 / 7.220

Copper: 1.610 / 1.600 / 1.587 / 1.565 / 1.492

(a) Which of these markets are normal? inverted? neit

(b) Which are in backwardation? in contango?

(c) Which market appears prima facie to have the greatest convenience yield?

3. A firm is planning to enter into a long forward hedge to offset a short forward position. If the firm chooses a futures contract over a forward contract, do they want the correlation of the spot to futures to be higher or lower than that of the spot to forwards?

4. A firm enters into a long eurodollar futures contract at a price of 94.59 and exit the contract a week later at a price of 94.23. What is the firm’s dollar gain or loss on this position?

Grading rubric
Calculates What Values of C Can the Oil Market be in Backwardation Based on Question 1 -1pt

Answers the Three Components of Question 2 – 4pts

Explains if a Firm Would Want the Correlation of the Spot to Futures to be Higher or Lower than that of the Spot to Forwards in Question 3 – 1pt

Calculates the Firm’s Dollar Gain or Loss on the Position in Question 4 -1pt