logics fails me… why in commodities futures F=S*e^((R-lease rate)*T). why lease rate is reducing the futures price??? the market seems to be willing to sell me futures commodity cheaper than what you pay if I cant lend it (i.e. I also make extra buck by not not only buying it cheaper today, but also lending it to make (extra) $$). what am I missing/overcomplicating
The lease rate takes into consideration, Storage costs, Convenience Yield, etc all into one number.
treat it like a dividend yield. from the holder stand point, if you hold the asset, you receive the dividends or the leasing fees, the future price should adjust for those cash inflows to the owner of the physical asset. those cash flows lower the value of the asset. for any asset, when people pricing them, all possible future cash flows will be factored in. if the F does not adjust for the lease yield that is already gone to the owner of the physical assets, the lease yield is double counted here. from the investors’ stand point the assumption is the holder of the physical asset will receive the leasing fees and the investors who buy the future will not. F which is the future price should adjust for the cash out flows, from the investors’ stand point.
You want to buy the commodity. You can buy it now in the spot market. Or you can postpone and buy in futures market. If you buy in the future market, you put your money aside and earn r on it. However, as you don’t have it, you cannot lease it. So you give up lease rate. The one who holds the commodity and sells it to you in the futures market increase today’s spot price by r for the time you earn r and he could not. And ofcourse you would want to decrease it by lease rate that you loose and he earns.
what does positive lease rate and negative lease rate mean?
It is better to look at the more specific equation as follows to understand: F = S e ^(RF - Lease rate - convenience yield + storage costs) when you own the commodity you can lease it out to someone (like renting it to someone else)… when it is a positive lease rate you can make money… buying the futures instead of the physical commodity doesn’t entitle you to the lease rate because you don’t own it… you jst bought the futures…
If Lease Rate is Negative then the markets are in BACKWARDATION If Lease Rate is Positive then the markets are in Contango You can make Money when mkts are in Backwardation by rollign the forward contracts.
both of you are contradicting each other… one of you is sayig postive rate makes money and the other negative!!! I got confused with stalla example. spot price :12.5, storage - 0.5, conve yield :0 r:6% if you calc one yr Forward price it comes to 13.75 suppose if the mkt price for forward contr is 13.9, then you will sell it forward and buy the spot. so far it is ok. they use the same example to calculate lease rate of -0.046 this is where I got lost as to how to interpret it.
willy’s definition takes Lease rate as the sum total… mine broke it apart. but I think they are saying exactly the same thing…
in this equation lease rate = convinience yield - storage cost so its either F = S*e^(RF - Lease rate) or F = S*e^(RF - (convenience yield - storage costs) = S*e^(RF + storage costs - convenience yield)
so is this the commodity Forward price, this is I had in my notes from Schweser: F = S e ^(RF - Lease rate - convenience yield + storage costs)
Realted to this: on Schweser Exam Vol 2, Exam 1, Q7 AM, they have a contango/backwardation question that doesn’t make sense to me: Question basics: high inventory of cattle, low demand. Without considering lease rate etc…, I thought that if inventory is high, then producers are willing to sell for less to guarantee/lock in a price (like corn), which puts the futures curver into backwardation. The answer to this question is contango since the convienence yield will be low. Is my first statement incorrect? (Schweser implies this in their study notes) What’s the logic for contango given above (w/o numbers)?
3rd & Long Wrote: ------------------------------------------------------- > so is this the commodity Forward price, this is I > had in my notes from Schweser: > > F = S e ^(RF - Lease rate - convenience yield + > storage costs) I don’t agree with this formula by including lease rate along with convinience yield and storage cost, you are double counting. CFAI uses one or the other, but not both.
i’m going with you Volkovv 
lease rate is inversely proportional to storage costs and directly proportional to convenience yields? Is this right?
CareerChange Wrote: ------------------------------------------------------- > lease rate is inversely proportional to storage > costs and directly proportional to convenience > yields? Is this right? that’s correct