Reading 36: Commodity Forwards and Futures－LOS b result, which

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CFA Institute Area 8-11, 13: Asset Valuation
Session 11: Alternative Investments for Portfolio Management
Reading 36: Commodity Forwards and Futures
LOS b, (Part 1): Identify and explain the arbitrage situations which arise as a result of the convenience yield of a commodity.

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Which of the following statements regarding commodity spreads is least accurate?

A) The difference in prices of crude oil, heating oil, and gasoline is known as a crush spread.

B) A trader creates a crush spread by holding a long position in soybeans and a short position in soybean meal and soybean oil.

C) A commodity spread results from a commodity that is an input in the production process of other commodities.

D) A 5-3-2 crack spread reflects 5 gallons of crude oil, 3 gallons of gasoline, and 2 gallons of heating oil.

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Answer and Explanation

The difference in prices of crude oil, heating oil, and gasoline is known as a crack spread.

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Which of the following statements regarding the convenience yield is least accurate?

A) The commodity borrower is willing to pay the value of the convenience yield less the cost of storage.

B) The forward price may appear lower at times, when the convenience yield is not considered.

C) When calculating the forward price including a convenience yield the convenience yield can be continuously compounded and proportional to the value of the commodity.

D) The convenience yield can be earned by the average investor who does not have a business reason for holding the commodity.

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Answer and Explanation

The convenience yield cannot be earned by the average investor who does not have a business reason for holding the commodity.

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A trader in soybean futures contracts has discovered an arbitrage opportunity involving soybean futures and futures on soybean meal and soybean oil. Of the following, this most likely can occur with a:

A) crack spread by holding a long position in soybeans and a long position in soybean meal and soybean oil.

B) crack spread by holding a long position in soybeans and a long position in soybean meal and short position in soybean oil.

C) crush spread by holding a short position in soybeans and a long position in soybean meal and soybean oil.

D) crush spread by holding a long position in soybeans and a long position in soybean meal and soybean oil.

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Answer and Explanation

The only possible answer is a position in the input (e.g., short) and the opposite position (long in this case) in both of the outputs. This is called a crush spread.