Chartered Financial Analyst (CFA) Practice Exam Level 2

In the context of commodity futures, how are storage costs related to futures prices?

1. Negatively correlated

2. Independently correlated

3. Positively correlated

4. Unpredictably correlated

The correct answer is: Positively correlated

In the context of commodity futures, storage costs exhibit a positive correlation with futures prices. This relationship stems from the economic principles surrounding the supply and demand dynamics of commodities. When storage costs increase, the overall cost of holding a commodity until the future increases as well. Consequently, traders and investors require higher futures prices to compensate for these increased costs. This positive correlation is particularly evident in the contango market, where futures prices are higher than the spot prices due to carrying costs, which include storage costs. As storage becomes more expensive, sellers of futures contracts will demand higher prices to offset these additional carrying costs, resulting in an upward pressure on futures prices. In simpler terms, if it becomes more expensive to store a commodity, the expected future price (futures price) of that commodity is likely to rise, reflecting the added cost that market participants face. Thus, understanding this relationship helps investors and analysts predict pricing in the commodities market accurately.