If there are net costs: FP = S(1+rf)^t + (storage costs - convenience yield) If there are net benefits: FP = S(1+rf)^t - (yield on asset + convenience yield) But if there are both you have FP = S(1+rf)^t + (storage costs - convenience yield) - (yield on asset + convenience yield). If you do the math out, that means you would be subtracting convenience yield twice (because you have two convenience yield terms and both have a negative sign). Is that correct–to subtract it twice??
you cannot have both net benefits and net costs. you would net them out first - and depending on the sign of the net figure you either have a benefit or a cost… then subtract the benefit, add the cost. That’s why it is call NET…
I’m gonna do what my SG says: subtract the convenience yield.
They use the word “net” for a reason, killer. Similar to reporting the funded status of a pension on a balance sheet, you only report the “net” amount as either an asset or a liability; using this logic, you’re going to “net” out the costs and benefits and get one “net” number.
I think you are right… I think it CY = yield on assets - storage cost i.e. take the net of the benefits and cost and plug that into the formula… FP = S(1+fr)^t - CY please someone correct me if my reasoning is wrong
CPK and I used the word “net” four times each in our post. That’s gotta be a good sign for me come Saturday. Yes, I am procrastinating on studying like you would not believe.
so for those contango/backwardation questions you just add the costs, subtract the benefits, arrive at a positive number (net costs) or a negative number (net benefits) and then subtract the conveneince yield?
can someone confirm the above please, thanks
do not know enough about all that. But when I see Net - that is what I would do!
lots of overthinking going on here …wat if i promised to deliver some widget in 1 yr …n we are talking bout the price …im going to charge u a price X but wait up u say this is a special widget that somehow attracts the opposite (or same if thats wat floatrs ur boat) then i got to charge u less cuz i will be receiving the benefit of the widget in the meantime …conversely if it drives away frenz then man oh man u gfot to pay me more …
Remember your Net Costs would increase/decrease your futures price… if you have a negative number (i.e. higher convenience that costs)… convenience yield would decrease your futures price (there was a sample question on this)… just compare the spot and the results of your calculation… if the result is less than spot…then it’s backwardation if higher you are in contango
I am a little bit unsure on this actually and also want to clarify if below is right: If there is a yield on asset, normally it does not involve storage cost. (Same vice versa) We do not need storage cost for a bond. And we can’t get interest/dividend by storing gold/copper. So there can only be either: net cost = storage cost - convenience yield or net benefit = asset yield + convenience yield Also, remember to take future values for NB and NC: FP = S(1+rf)^t + FV(NC) FP = S(1+rf)^t - FV(NB)
punter, i was originally thinking of it the same way as you. i was getting confused because if you have both asset yields and sotrage costs you have benefits and costs. so i was adding both and ending up with 2 convenience yields. but thats not correct to do because those are net numbers. so first find the net amount. then subtract the convenenice yield to lower the future price.