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All main topics / Finance & Investment / Derivatives / Derivatives
80
Which of the following is true for a consumption commodity?
A.There is no limit to how high or low the futures price can be, except that the futures price cannot be negative
B.There is a lower limit to the futures price but no upper limit
C.There is an upper limit to the futures price but no lower limit, except that the futures price cannot be negative
D.The futures price can be determined with reasonable accuracy from the spot price and interest rates
Answer: C

If the futures price of a consumption commodity becomes too high an arbitrageur will buy the commodity and sell futures to lock in a profit. An arbitrageur cannot follow the opposite strategy of buying futures and selling or shorting the asset when the futures price is low.  This is because consumption assets cannot be shorted . Furthermore, people who hold the asset in general do so because they need the asset for their business. They are not prepared to swap their position in the asset for a similar position in a futures. Consequently, there is an upper limit but no lower limit to the futures price.


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Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015

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