Maybe this issue was discussed before, but the concepts are still not clear too me. IMO, lease rate shall be (only) a kind of convenience yield. So, Contango : upward-sloping forward curve, shall be convenience yield > risk-free rate Backwardation : upward-sloping forward curve, shall be convenience yield < risk-free rate. But it is stated in the text (CFAI, Vol 5, P.182, 3rd paragraph) Contango : upward-sloping forward curve occurs when LEASE RATE > risk-free rate Backwardation : upward-sloping forward curve occurs when LEASE RATE < risk-free rate. Why LEASE RATE (rather than convenience yield) is referred here in the text ?
Correction IMO, lease rate shall be (only) a kind of convenience yield. So, Contango : upward-sloping forward curve, shall be convenience yield > (risk-free rate + storage cost) Backwardation : upward-sloping forward curve, shall be convenience yield < (risk-free rate + storage cost)
You may be over thinking this. The only thing the convenience yield does, is ensure that there is a no arbitrage “range” of forward prices. This is because the convenience yield is only available to entities who have a use for the commodity. It is generally not possible for an arbitrageur to earn the convenience yield. What ever the convenience yield is, the forward price will always be greater than: S(0)e^(r+s-c) and will always be less than S(0)e^(r+s) and the fact that the no arbitrage prices fall within this range, reflects the fact that the convenience yield will only be paid by those who have a use for the commodity.
What I am talking about are the relationships of convenience yield/lease rate/storage cost/risk-free rate with the forward curve (contango/backwardation). Not “no arbitrage price range”.
Lease rate = Convenience yield - Storage cost ======similar to====== [OAS = zSpread - option cost]
soddy and deriv , thanks for clarifying
Thank you !