PRMIA Exam 8006 Topic 7 Question 90 Discussion

Actual exam question for PRMIA's Exam I: Finance Theory, Financial Instruments, Financial Markets – 2015 Edition exam

Question #: 90
Topic #: 7

[All Exam I: Finance Theory, Financial Instruments, Financial Markets – 2015 Edition Questions]

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

AChanges in the convenience yield and storage costs

BChanges in spot prices and carrying costs, also called commodity lease rates

CChanges in interest rates and spot prices

DThe risk from change in basis and interest rates

Show Suggested Answer

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.

by Cristy at Jun 22, 2024, 10:10 AM

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Ellsworth

3 months ago

B seems like the obvious choice here. I mean, who doesn't love a good spot price and carrying cost combo, am I right folks? *crickets*

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Trinidad

2 months ago

B) Changes in spot prices and carrying costs, also called commodity lease rates

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Almeta

2 months ago

A) Changes in the convenience yield and storage costs

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Mabel

3 months ago

I believe it's B) because spot prices and carrying costs directly impact the risk in a commodities futures portfolio.

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Irma

3 months ago

I'm not sure, but I think it could also be D) The risk from change in basis and interest rates.

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Dean

3 months ago

Option B is the way to go. Gotta watch out for those pesky carrying costs, am I right? *wink*

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Beatriz

3 months ago

Definitely B. Spot prices and carrying costs are the foundations of commodity futures risk. Simple and straightforward.

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Pearlie

2 months ago

I see your point, but I still think the risk from changes in basis and interest rates is important to consider.

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Raina

2 months ago

I believe changes in interest rates and spot prices are the main components of risk in commodities futures.

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Shelia

2 months ago

I think changes in convenience yield and storage costs also play a significant role.

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Estrella

2 months ago

I agree, spot prices and carrying costs are crucial in assessing risk.

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Latrice

3 months ago

I agree with Gilbert, spot prices and carrying costs are key components of risk in commodities futures.

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Curtis

4 months ago

I think the correct answer is B. Changes in spot prices and carrying costs, also called commodity lease rates. That covers the two main components of risk in a commodities futures portfolio.

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