For a forward contract on a commodity, an increase in carrying costs (all other factors remaining constant) has the effect of:

For a forward contract on a commodity, an increase in carrying costs (all other factors remaining constant) has the effect of:
A . increasing the forward price
B . decreasing the forward price
C . increasing the spot price
D . decreasing the spot price

View Answer

Answer: A

Explanation:

The forward price for a commodity is nothing but the spot price plus carrying costs till the maturity date of the forward contract. Any increase in carrying costs therefore has the effect of increasing the forward price. Note that carrying costs include interest cost in respect of funding the position, costs of storage, less any convenience yield. Increase in the carrying costs will not affect the spot prices.