commodity spot 300, 1 year forword 500, lease rate =30%, borrow rate =20%, can anyone list the t0 and t1 (i year later) cash flow? thanks.
can anyone help to show calculation of the payoff ? is lease rate same as convinence yield? why in non-arbitrage price range, we only consider storage cost, convinence yield, but we didn’t consider lease rate?
Lease rate is not the same as convenience yield. You have to pay the lease rate if you do not have the commodity and want to short sell it, i.e. you have to lease it to deliver it and pay a lease rate (as if you lease a car). The convenience yield is essentially a “plug” that explains the relationship between forward and spot prices. It is interpreted as the benefit from holding the commodity physically. Because convenience yield is subtracted, it explains backwardation or contango. You should definitely have a deeper look into the commodity section in the ORIGINAL CFAI Book. There are plenty of example and explanations.
linping85 Wrote: ------------------------------------------------------- > commodity spot 300, 1 year forword 500, lease rate > =30%, borrow rate =20%, > can anyone list the t0 and t1 (i year later) cash > flow? thanks. Your problem has unbelievable arbitrage!
cash and carry. borrow at 20% - pay to borrow cash use cash to buy spot sell forward earn storage - counterparty has to pay you to store it at expiration, delivery underlying, receive forward price, repay loan