Commodities

1. Spot price: Rs 2,500, Period: 90 days, Interest rate: 6% per annum, Storage cost: 1% per annum. Calculate the Fair
Value of the commodity after 90 days using discrete and continuous compounding.

2. The cost of 10 grams of gold in the spot market is Rs 50,000, and the cost of financing is 12 per cent per annum,
compounded monthly (i.e., m = 12). The fair value of a 4- month futures contract will be

3. If the cost of 10 grams of gold in the spot market is Rs 50,000 and the cost of financing is 12% per annum
(continuously compounded), the fair value of a 4-month futures contract will be:

4. Assume that the spot price of gold is Rs. 6,000 per 1 gram. If the financing cost is 12% p.a. with continuous
compounding, warehousing and insurance costs with continuous compounding are placed at 3%. What would be the
value of 2 Month, 6 Month and 9 Month future contracts on gold with and without warehousing and insurance
costs?

5. A sugar mill in UP. It is expected to produce 100 MT of Sugar in April. The price in the month of February is Rs.
22 per kg. An April future contract in Sugar, due on 20 th April, is trading at Rs. 25 per kg. The sugar mill
apprehends a sugar price of less than Rs. 25 per kg. will prevail in April due to excessive supply. How can the
sugar mill hedge its position against the anticipated decline in sugar prices in April? Create a strategy assuming the
price in Sugar will be Rs. 22 or Rs. 26 Per KG.

6. Assume that the spot price of gold in June is Rs. 50,000 per 10 grams, and the cost of carry for one month is Rs.700
per 10 grams. However, the July gold futures are trading at Rs.51,200 per 10 grams. Find out any arbitrage
opportunity available and how it can be used.

7. In May, 1 kg of silver spot price was Rs. 50,000 per Kg. The interest rate prevailing in the market is 10% for
lending and borrowing. July future contracts trade at Rs. 51,500 per Kg. Mr X wants to exploit the arbitrage
opportunity if any is available. As an investment advisor, find out the same for your client Mr X

8. 1st May 2022, 1 kg of silver spot price was Rs. 40,500 per Kg. The interest rate prevailing in the market is 10% for
lending and borrowing. June future contracts trade at Rs. 40,600 per Kg (Expiry last day of the month). Mr X wants
to exploit the arbitrage opportunity if any is available. As an investment advisor, find out the same for your client

9. Spot Price of Gold Rs. 40,000

Interest Rate 12%
Storage cost Rs. 500 advances are paid every six months.
Calculate future price for 6 months and 12 months.

10. Spot Price of Gold Rs. 40,000

Interest Rate 12%
Storage cost Rs. 500 advances are paid every six months.
Convenience yield @2%
Calculate future price for 6 months and 12 months.

11. Today is 24th March. A refinery needs 1075 barrels of crude oil in the month of September. The current price of
crude oil is Rs. 3,000 per barrel. September’s future contract at MCX is trading at Rs. 3200. The firm expects the
price to go up beyond Rs. 3200 in September. It has the option of buying the stock now; it can hedge through a
future contract. The size of the future contract is 100 barrels.
a. If the cost of capital, insurance and storage is 15% p.a., examine whether it is beneficial for the firm to buy
now.
b. Instead, what strategy can the firm adopt if the upper limit to buying price is Rs.3,200?
c. If the firm decided to hedge through the future, find out the effective price it would pay for crude oil if the
time of lifting the hedge the spot and future prices are (i.) Rs. 2900 and Rs. 2910, Respectively, (ii) Rs. 3,300
and Rs. 3,315, respectively.
12. A Jute packaging unit has planned production of 4300 kg. of jute to be sold six months later. The spot price of jute
is Rs. 1900 per kg. A 6-month future is trading at Rs. 1850 per kg. the prices are expected to fall as low as Rs. 1700
per kg. six months later. What can the jute packaging unit do to mitigate its risk of reduced profit? If it decided to
use the future market, what would the effective realised price for the sale of jute be when the spot and future prices
were Rs. 1750 per kg. and Rs. 1755 per kg., respectively? Assume the contract size of future contracts as 200 kgs.

13. A sugar trader is extremely bullish, with the current price at Rs. 25 per kg. A future contract on Sugar with 3
months to maturity is trading at Rs. 28 per kg. One contract in Sugar is for 1000 kg, with a 10% margin.

a. With funds of Rs. 1,00,000 available, what could the trader’s strategy be if there is expected to rise by 20% in
3 months?
b. At what minimum expected price after 3 months of taking a position in futures would the strategy be more
profitable?
c. What happens if the price of Sugar falls to Rs. 24 per kg.?

14. Consider a one-year futures contract on gold. We assume no income and that storing gold costs $2 per ounce per
year, with the payment being made at the end of the year. The gold spot price is $1,600, and the risk-free rate is 5%
per year for all maturities.

15. The spot price of silver is $15 per ounce. The storage costs are $0.24 per ounce per year, payable semi-annually in
advance. Assuming that interest rates are 10% per annum for all maturities, calculate the futures price of silver for
delivery in 12 months.

16. A trader buys two July futures contracts on orange juice. Each contract is for the delivery of 15,000 pounds. The
current futures price is 160 cents per pound, the initial margin is $6,000 per contract, and the maintenance margin is
$4,500 per contract. What price change would lead to a margin call? Under what circumstances could $2,000 be
withdrawn from the margin account?

17. A company enters into a short futures contract to sell 5,000 bushels of wheat for 450 cents per bushel. The initial
margin is $3,000, and the maintenance margin is $2,000. What price change would lead to a margin call? Under
what circumstances could $1,500 be withdrawn from the margin account?

18. A company enters into a short futures contract to sell 5,000 bushels of wheat for 250 cents per bushel. The initial
margin is $3,000 and the maintenance margin is $2,000. What price change would lead to a margin call?

19. An investor has realised a 5% price return on a commodity futures contract position and a 2.5% roll return after all
her contracts were rolled forward. She had held this position for one year with collateral equal to 100% of the
position at a risk-free rate of 2% per year. Her total return on this position (annualised excluding leverage) was:

20. An investor has a $10,000 position in long futures contracts (for a hypothetical commodity) that he wants to roll
forward. The current contracts, which are close to expiration, are valued at $4.00 per contract, whereas the longer-
term contract he wants to roll into is valued at $2.50 per contract. What are the transactions— in terms of buying
and selling new contracts—he needs to execute to maintain his current exposure?

21. A portfolio manager enters into a $100 million (notional) total return commodity swap to obtain a long position in
commodity exposure. The position is reset monthly against a broad-based commodity index. At the end of the first
month, the index is up 3%, and at the end of the second month, the index declines 2%. What two payments would
occur between the portfolio manager and the swap dealer on the other side of the transaction?