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PRMIA Exam 8006 Topic 3 Question 76 Discussion

Actual exam question for PRMIA's Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition exam
Question #: 76
Topic #: 3
[All Exam I: Finance Theory, Financial Instruments, Financial Markets ? 2015 Edition Questions]

The two components of risk in a commodities futures portfolio are:

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Suggested Answer: B

Commodity futures prices can be expressed as the summation of their spot prices and the carrying costs. Therefore any changes in either of these two would be a risk to the futures prices, and Choice 'b' is the correct answer. It is common to decompose complex commodity portfolios into underlying equivalent spot positions and the carrying costs, which includes interest, convenience yield and storage costs. For liquid commodities such as gold where changes of a short squeeze are low, interest costs dominate the carryings costs. Choice 'b' is the correct answer as it is most complete and covers the elements in the other choices. The 'lease rate' for a commodity is equivalent to (Fwd Price - Spot Price)/Spot Price, and comprises the interest and storage costs and the convenience yield. The other choices do not represent complete answers.


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