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Spot price for silver is $154
Spot price for silver is $154.70 per ton and the 12-month silver futures is traded at $150.00. The 1-year interest rate is 4% (annually compounded). i) What is the net convenience yield (annually compound) on silver for the 12 month period? (3 marks) ii) You need 1,000 tons of silver in 12 months. How would you lock into a price today using the futures contracts? (The size for each silver futures contract is 100 tons.)
Expert Solution
Answer i)
We know that,
Futures price = Spot price of the physical commodity + Direct storage costs – Convenience yield
Since, for silver the direct storage costs are negligible,then
Direct storage costs for silver = 0
Also, given Spot price for silver =$ 154.70 per ton
Futures price for Silver = $150
Therefore Convenience yield by Theory of storage = Spot Price -Futures Price
= 154.70-150
=$4.70
Answer ii) Since, I need the 1000 tons of silver I will long the silver futures.
No. of futures contract I need = total quantity to be purchased/Lot size of one futures contract
=1000/100
=10 contracts
Therefore, in order to lock in a price of $150 for 100 tons of silver one year from now, I will purchase 10 contracts of $150 each.
Cost for purchasing 10 contracts = 10 *$150 = $1500
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