Consider the factors that affect the price of futures contracts on various commodities. Which of the following statements does not accurately describe the relationship between a commodity’s futures price and its underlying factors?
A. Gold futures have an implicit lease rate which, because it is not actually paid by commodity borrowers, creates incentive to hold physical rather than synthetic gold as ideal strategy to gain gold exposure.
B. Natural gas is produced relatively consistently but has seasonal demand, causing the futures price to rise steadily in the fall months, since natural gas is too expensive to store.
C. The cost of storing corn, which has relatively constant demand, causes the futures price to rise until the next harvest at which point the price falls.
D. Relatively constant worldwide demand for oil and its ability to be cheaply transported keep oil prices relatively stable in the absence of short-run supply and demand.
Answer:A
Gold can be loaned out to financial intermediaries and other investors willing to pay the lease rate (the price for borrowing the gold) to the lender. Thus, holding physical gold requires the investor to forgo earning the lease rate while also incurring storage costs. Therefore, the ideal gold exposure strategy is generally to hold synthetic gold.