If the spot price of gold is Rs. 60,000 per 10 grams and the annualized cost of carry (storage, insurance, and financing) is 6.0% per annum, what is the theoretical fair value of a 4-month gold futures contract, and what term describes a market where futures price exceeds spot price?

[ A ]Fair futures price is Rs. 61,200; the market structure is in Contango.[ CORRECT ]

[ B ]Fair futures price is Rs. 58,800; the market structure is in Backwardation.

[ C ]Fair futures price is Rs. 63,600; the market structure is in Arbitrage.

[ D ]Fair futures price is Rs. 60,000; the market structure is in Parity.

Takeaway

Option A is correct: Fair futures price is Rs. 61,200; the market structure is in Contango.

Derivation

The theoretical fair value of a commodity futures contract equals Spot Price plus Cost of Carry. Formula: Futures Price = Spot Price * [1 + r * (t / 12)]. Substituting the values: Futures Price = 60,000 + [60,000 * 0.06 * (4 / 12)] = 60,000 + [60,000 * 0.02] = 60,000 + 1,200 = Rs. 61,200. When the futures price trades at a premium above the spot price (Futures > Spot), the market condition is termed 'Contango'. When Futures < Spot, it is termed 'Backwardation'. This tests commodity pricing math. The primary trap is multiplying by full 12-month carry (Rs. 63,600).

Why the others fail

B — Fair futures price is Rs. 58,800; the market structure is in Backwardation.

Rs. 58,800 incorrectly subtracts the cost of carry from spot price and confuses Contango with Backwardation.

C — Fair futures price is Rs. 63,600; the market structure is in Arbitrage.

Rs. 63,600 mistakenly applies a full 12 months of carrying cost (6%) instead of prorating for the 4-month contract duration.

D — Fair futures price is Rs. 60,000; the market structure is in Parity.

Rs. 60,000 assumes zero cost of carry over 4 months, which contradicts physical storage and financing reality.