PRMIA Exam 8006 Topic 8 Question 81 Discussion

Actual exam question for PRMIA's 8006 exam

Question #: 81
Topic #: 8

[All 8006 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 Johnna at Feb 07, 2024, 06:55 PM

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7 months ago

I think the answer is B.

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