NISM Series XVI - Commodity Derivatives Exam Notes
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If the value of 'r' is compounded 'm' times in a year, the formula to calculate the fair value will be: F = S * (1+ r / m) ^ (m * n)
The fair value of a futures price with continuous/daily compounding can be expressed as: F = S*e^ (r*n)
Convenience yield indicates the benefit of owning a commodity rather than buying a futures contract on that commodity.
F = S + C - Y where F - Futures Price S- Spot Price C- Cost of carry Y- Convenience Yield
The commodity derivatives exchanges need spot price information on a daily basis to be used as the basis for the commodity futures contracts traded on their platforms. These prices are disseminated by the exchanges and are also used for determining the Final Settlement Price (FSP).
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