I think Schweser has this answer wrong, because a convenience yield on a future does in fact reduce the value of the future contract. Aren’t I correct?
i am confused by this Q too. But, on the hand, i reasoned that it’s a short position, opposite to long… Anybody has better explanation?
#114 on that vin is also wrong. An increase in dividends on the underlying asset will reduce the value of a future contract, so it would be best to be short the future in that case. I am correct here too right?
A high convenience yield can result in the spot price being HIGHER than the futures price, because some users will PAY MORE for the commodity today in order to keep stock on-hand. The way that these users can justify this mathematically is with the convenience yield; it is almost like these producers are getting an invisible yield from buying the commodity at a spot price that is higher than the futures price. The part of his explanation that is really clearly wrong is the bit about “If there were no cash flows associated with the underlying asset, the price would be higher.” There are no cash flows associated with the convenience yield; the commodity users receive only a non-cash benefit; the convenience yield.
You are incorrect. Dividends help you, so if divs go up you wanna be long. westibbs Wrote: ------------------------------------------------------- > #114 on that vin is also wrong. An increase in > dividends on the underlying asset will reduce the > value of a future contract, so it would be best to > be short the future in that case. I am correct > here too right?
But you are long the futures contract, not the underlying. You don’t own the underlying and thus don’t get the benefit of the increase in dividends. Future position decreases in value just like a futures position on a stock with a dividend.
yeah but as the answer says, the SPOT PRICE OF THE INDEX will go up. Therefore the value of the futures price goes up too. I can’t really explain the shorting part of their explanation can you?
For #111, there are no non-monetary benefits from holding an equity index, so no convenience yield. For#114, this is a permanent increase in g, which if you think back the Dividend discount model, means an increase in the current value. A one time increase in the dividend would decrease the value of the index, but a permanent increase in g would be beneficial. The short comment that is made simply means that there is positive value for the future, and you could execute the opposite transaction to lock in that value.