Chartered Alternative Investment Analyst (CAIA) Practice Exam 2025 – All-in-One Guide to Master Your Certification!

The correct answer is based on the concept of carry costs, which are essential to understanding the pricing of forward contracts on physical assets.

Storage costs represent the expenses incurred in storing the physical asset until the forward contract is settled. These costs are crucial because they affect the total cost the holder of the asset incurs and, consequently, the pricing of the forward contract. Higher storage costs generally lead to higher forward prices, as the seller needs to cover these expenses.

Convenience yield refers to the benefits that the holder of a physical asset derives from having immediate access to it compared to holding a contract. For example, in times of scarcity, being able to use the asset immediately might have additional value. This yield affects the pricing of forwards because it provides a potential benefit that those pursuing a forward contract may need to consider.

Interest rate charges are the opportunity costs associated with tying up capital in physical assets instead of investing that capital elsewhere to earn interest. This is a significant factor since it influences how the market prices forward contracts. If interest rates are high, the cost of carry increases, leading to higher forward prices.

Together, these three factors—storage costs, convenience yield, and interest rate charges—play a critical role in determining the price of forward contracts on physical