Suppose the cotton (a storable commodity) futures prices are currently: Expiry month Price c/lb December 2021 83
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Question:
Suppose the cotton (a storable commodity) futures prices are currently:
Expiry month | Price c/lb |
December 2021 | 83 |
December 2022 | 96 |
(a) Is the cotton market in contango or in backwardation?
(b) What is the slope of the futures curve for cotton? Draw a future curve graph to support your answer.
(c) Are there positive returns to storage between Dec 21 and Dec 22? Draw a graph of supply and demand for storage to support your answer (where t=Dec 21 and t+1=Dec22).
(d) Suppose an unexpected typhoon destroys cotton crops in India. This causes a downward revision in the expected global cotton production in 2022. Assuming all else equal, will demand storage of cotton in 2021 (St) increase, decrease or stay the same? Draw a graph of the demand for storage to support your answer.
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