Commodities Quiz

Dwight Wrote:
——————————————————-
> mwvt9 Wrote:
> ————————————————–
> —–
> > Convenience yield is only available to those
> who
> > have a valid business purpose for holding the
> > commodity.
> >
> > And I believe - Convenience yield - storage
> costs
> > = lease rate
> >
> > but I am not sure.
>
>
> The problems states that the investor:
> “recognizes a convenience yield”.
>
> Still not sold.
I lied. The whole reason there is a zone is because some can realize the convenience yield while others can’t. If you can’t realize the convenience yield you will pay the upper bound. If you can realize the convenience yield you pay the lower bound.
Regardless the question asked if the upper bound was affected and I can’t see how it is.
 
Dwight,
what you are missing here maybe is that the no arbitrage price range is not from a investor point of view. in the general market this will be the no arbitrage price.
It is a range coz for some there is a convenience yield like the investor in this case.
 
mwvt9 Wrote:
——————————————————-
> I lied. The whole reason there is a zone is
> because some can realize the convenience yield
> while others can’t. If you can’t realize the
> convenience yield you will pay the upper bound.
> If you can realize the convenience yield you pay
> the lower bound.
>
> Regardless the question asked if the upper bound
> was affected and I can’t see how it is.
“If you can’t realize the convenience yield you will pay the upper bound.”
^Got it thanks. Upper bound exists regardless of the convenience yield.
 
heer Wrote:
——————————————————-
> Dwight,
>
> what you are missing here maybe is that the no
> arbitrage price range is not from a investor point
> of view. in the general market this will be the no
> arbitrage price.
>
> It is a range coz for some there is a convenience
> yield like the investor in this case.
You’re right, I am looking at it purely from the standpoint of the investor/arbitrageur. The size of the convenience yield determines the arbitrage profit, and lower bound, but the upper bound is fixed by other factors.
Thanks.
 
can somebody post the complete answer with official description please?
 
Got the rest of them right, just had problem with the 5th one. As I understand, diesel, gasoline, heating oil and kerosene are all produced by cracking crude oil, so when it says 4-3-7 crack spread, which products are you guys taking. I am confused because no where its mentioned if we have to calculate crack spread for a particular set of petro-based products.
Can someone please explain the logic?
 
7-4-3 is always crude,gasoline and heating oil in that order. diesel may be a product of cracking, but it is probably not in this ratio. 7 crude oil barrels result in 4 gasoline and 3 heating oil barrels.
there are other crack spreads too (not relevant for cfa l3) http://en.wikipedia.org/wiki/Crack_spread
 
Working for Crack Spread
Input will be Crude oil 7 barrels (production in one month) to generate output of 4 barrels of Gasoline and 3 barrels of Heating oil (both delivery in 2 months).
Input - Crude oil 7 x $61 = $427
Output – Gasoline 4 x $82 = $328
Output – Heating oil 3 x $86 = $258
Total for 7 barrels $159
Per barrel $22.71
 
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