convenience yield?!?

CFA Level II
#1

Can someone explain to me the general concept of these 2 little words? all i know is that the its worth more to hold the asset than to borrow it and it makes the foward price less than spot price (willing to pay more to have it NOW) = backwardation. Any calculation involved for this yield?

#2

its a futures concept i believe: FP = So(1+r) - FV (NC) FV(NC) is the future value of the non cash charges or the convenience yield quite a weird topic indeed 1luv free tibet brappp

#3

Can be used to explain contango and backwardation as well. Backwardation occurs if there is significant benefit to holding the asset as oposed to owning a future on the asset. Think of it as a benefit to holding the underlying, which makes underlying more valuable than future/forward

#4

simply… the additional YIELD for the CONVENIENCE of holding it or having it on hand. Think of a Cereal producer. The producer might like to hold a few thousand extra tons of grain in its inventory (than it needs) to protect against disruptions in supply, price fluctuations, etc. Even though, for the most part, the firm doesn’t plan on using that extra grain until 3 months from now… it’s not exactly the same for the firm to buy grain futures maturing in 3 months. There’s a benefit to the firm in having the physical grain in its warehouse… for that, the firm will pay a “convenience yield” (a price for the spot price a little higher than would be indicated by the futures price and other variables).

#5

thanks guys that helps.

#6

I was discussing this with another friend yesterday. If the convenience yield is greater than the risk free rate this will mean the futures is what? I think we agreed on higher because the purchasers of the forward have to pay a premium for it?

#7

i though the futures price is LOWER because its more demnaded to hold it NOW…so spot price is more?

#8

‘convenience’ yield has be non monetary in nature,afaik. otherwise it is called as ‘benefit’

#9

yes. (spot > PV futures for convenience yield). I think adalak meant the price you pay for the convenience yield in his equation. I’m not I really understand what he said, though.