Amaze Yield, Inc. is a commodity trading firm. Denis is the head trader and mainly trades the agricultural markets. Sinc

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Amaze Yield, Inc. is a commodity trading firm. Denis is the head
trader and mainly trades the agricultural markets.
Since Denis expects an increase in the spot prices of corn and
wheat, on 1 September 2022, he considers purchasing corn and wheat
futures contracts for delivery on 15 December 2022. Price data for
corn and wheat are presented in Table 1.
Table 1 Corn and Wheat Spot and Futures
Prices
Price per Bushel
as of 1 September 2022
Spot corn
$2.65
Spot wheat
$4.20
December 2022 corn
$2.85
December 2022 wheat
$3.70
Denis opened a long position of 100 wheat futures contracts for
delivery December 2022. One month later, on 1 October, a hail storm
destroyed significantly wheat crops. As a result, there is a
temporary shortage in the supply of wheat.
On 14 December, one day before the wheat futures contracts
mature, Denis decides to maintain his exposure to wheat, so he
sells his December wheat futures contracts and purchases March
wheat futures contracts for delivery on 15 March 2023. Price data
for wheat is shown in Table 2:
Table 2 Wheat Spot and Futures Prices
Price per Bushel
as of 14 December 2022
Spot wheat
$4.50
March 2023 wheat
$4.20
(b) (4 marks) Describe what is contango and
backwardation with respect to the term structure of forward curve
of commodity futures. Based on Table 1, decide whether the forward
curve of wheat can best be described as being in contango or in
backwardation.
(c) (3 marks) What is convenience yield? Explain how
the events on 1 October affected December wheat’s convenience
yield.
(d) (3 marks) What is roll yield? Based on Table 2,
explain whether the roll return on the wheat futures contracts
investment on 14 December is positive or negative.