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Refer to the following table. It shows 2000 forward curves (vertical) as observed in each month of 1999 (horizontal) for the PJM electricity contracts.
a. Is the July’00 – September’00 portion of the forward curve in contango or in backwardation during 1999? How do you explain this observation?
b. Is your answer for the July – September part of the curve also valid for every portion of the January’00 – October’00 curve? Based on this, is it reasonable to model forward price as a function of convenience yield while holding convenience yield constant?
c. You are a trader that bets on July – September spread narrowing between March and December of 1999. What positions should you take in the July and in the September contracts (which one long, which one short)?
d. What is the total profit / loss made on your position between March, when the position is open, and December, when the position is closed? Ignore position sizes.
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