Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

Given the spot price of a commodity and associated costs, what would be the buyer's break-even futures price?

1. $3.00.

2. $3.05.

3. $3.10.

4. $3.15.

The correct answer is: $3.10.

To determine the buyer's break-even futures price for a commodity, you need to consider the spot price and the associated costs that a buyer will incur. The break-even futures price is essentially the price at which the total cost of purchasing the future contract equals the total expenses involved in acquiring the commodity, including any carrying costs or storage fees. When calculating the break-even futures price, the formula is often represented as: Break-even Futures Price = Spot Price + Cost of Carry (which includes storage, interest costs, etc.) In this scenario, since C is selected as the answer, it implies that after considering the spot price plus any additional associated costs (which might be storage fees, financing costs, etc.), the result totals to $3.10. This price ensures that the buyer does not incur a loss when they choose to buy the commodity at the futures price, as it covers all the costs. For the other options, if the selected answer correctly reflects the costs in relation to the spot price, the other figures ($3.00, $3.05, and $3.15) do not align with the necessary calculations to achieve that break-even point. Therefore, $3.10 is the amount where the buyer would break even, making