This is Q4, Schweser Book 4, Pg 70 Suppose the owner of a commodity decides to lend out the commodity. If convenience yield is c, lease rate is l, storage rate is s, risk free rate is r. Which of the following best represents the lowest forward price at time T (S0 is the spot price at t=0): a) S0*e^[r+s-c]*T b) S0*e^[r+s]*T c) S0*e^[r-l-c]*T d) S0*e^[r+s+c]*T Ans provided - (a) Shouldn’t the lowest forward price be S0*e^[r+s-l-c]*T, taking into account benefit from leasing, convenience yield & cost from storage. Since this option is not provided, I would guess that © is lower than (a) probably and hence © should be the best possible answer. Can someone clarify? - BN
the lease rate is a combination of storage costs, convenience cost, etc. In other words, the lease rate it the equivalent rate which accounts for individual components such as convenience yield, storate costs, etc. It does not exist on it’s own.
This kind of question should never be on the exam!!!