Chapter 26, Problem 1PS

Vocabulary check* Define the following terms:

1. a. Spot price
2. b. Forward vs. futures contract
3. c. Long vs. short position
4. d. Basis risk
5. e. Mark to market
6. f. Net convenience yield

Summary Introduction

To discuss: The following words.

Explanation of Solution

1. a.      Spot price is defined as price paid for quick delivery.
2. b.      Forward contracts are agreement to purchase or sell at a definite future date at a certain price. Future contracts are also agreement to purchase or sell at a specified future date at a certain price. Even though, they differ from forward contract that is an exchange traded and marked to market.
3. c.       Long position can be defined as investors have long period and have agreed to purchase the asset. Short position means investors are short have agreement to sell.
4. d.      Basis can be defined as the risk that arises due to the price of the asset used to hedge does not perfectly correlated with that of the asset that is being hedged.
5. e.       Mark to market can be defined as the day to day settlement of profit and loses arise from a position.
6. f.        Net convenience yield means the benefit from owning the commodity rather than the assurance of future delivery less the cost of keeping the commodity.