# Commodity arbitrage as a result of convenience yield

Can someone who understands this concept pls explain it to me. I’m not sure of the underlying concepts in the following no-arbitrage range of prices: S0e^(Rf + a - c)t =< F0,t =< S0e^(Rf + a)t where S0 = current spot price Rf = Risk free rate a = Storage costs c = Convenience yield F0,t = Forward price at time t

anyone?

Hi Magix, The forward rate is paying u for carrying some risk, when u r bearing the storage cost , u would like to be paid for that , but the convenience yield is ur present advantage so u’ll not be paid for it in future. So at max u can earn So( Rf+a)T and the least u’ll get is adjusted for convenience yield. Hope it makes sense…

And I think that every investor in the commodities falls somewhere between the ends of the spectrum (end points included). It will all depend on what your convenience yield is worth to you in your business capacity…

rasharma Wrote: ------------------------------------------------------- > Hi Magix, > > The forward rate is paying u for carrying some > risk, when u r bearing the storage cost , u would > like to be paid for that , but the convenience > yield is ur present advantage so u’ll not be paid > for it in future. So at max u can earn So( Rf+a)T > and the least u’ll get is adjusted for convenience > yield. > > Hope it makes sense… Hi rasharma, That made sense. Thanks for the explanation. Very helpful.