Question

Suppose that the forward price for a ton of lumber 1 year from now is $4,800. Storing a ton of lumber in a safe location for a year costs 5% of its value. The relevant interest rate is 18%. If the spot price of a ton of lumber is $4,000, what must be the convenience yield for this commodity?

Answer 1

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Answer

the current price of a ton of lumber  = $4,000

cost for storing a ton of lumber = 5% of 4,000

cost for storing a ton of lumber =(5*4000)/100

cost for storing a ton of lumber =20,000/100

cost for storing a ton of lumber =$200

interest rate = 18%

To purchase a ton lumber we have to invest $4,000 after the end of the year we have to 4,000+ interest on 4,000

so interest on 4,000 =(18*4,000)/100

interest on 4,000 =72,000/100

interest on 4,000 =$720

so Total cost to purchase a ton of timber and store for one year = value of a ton of lumber + interest rate on amount + storing cost

Total cost =4,000+720+200

Total cost =4,920

and

Total revenue for a ton lumber after a year = $4,800

Loss = Total cost - Total revenue

Loss=4920-4800

Loss =$120

so if want do this investment   the minimum forward price for a ton of lumber 1 year from now should be $4,920