I understand the commodity lease rates is convenience yield - storage costs Lease rate - the rate of return an investor requires to buy the commodity and then lend the commodity convenience yield - holding the commodity for non monetary return If I think lease rate from a perspective, he buys the car and leases it out and the lease rate makes sense I do not understand how lease rate is convenience yield - storage costs especially if convenience yield is non monetary benefit Any commodity gurus explain in plain english I still don’t understand why the upper bound depends on the storage costs and not convenience yield in the no arbitrage formula
drk Wrote: ------------------------------------------------------- > I still don’t understand why the upper bound > depends on the storage costs and not convenience > yield in the no arbitrage formula Because if there are costs associated with holding the commodity, the holder must be “compensated” for holding it, hence the higher futures price and why costs establish the upper bound. Conversely, if the holder is able to achieve a convenience yield, the futures price must be lowered to reflect that benefit. Think about it, if you could buy a commodity for $100 and receive $5 in terms of benefits (associated with holding it), you have to downwardly adjust the futures price because those benefits are accruing to the current holder of the commodity and not the party long the futures. Similarly if the there are storage costs associated with holding the commodity, the holder needs to be compensated because he is incurring the costs, not the long in the contract.
Thanks. this makes more sense.