So it states, Synthetic gold is preferred to holding physical gold when we have a positive lease rate. Trying to understand the intuition behind the same. I understand lease rate = storage cost- convienence yield but not sure how to make sense of the rest. I did try searching the forums, but did not find any discussion on this. Thanks in advance
My understanding is that when lease rate is positive, the futures price calculation will be less than if lease rate is zero or negative: F=S*e^[(r-lease rate)T] If lease rate is positive, F will be smaller than if only looking at it as a replacement for owning the risk free security. With a smaller price on the futures, one can accept a roll return in excess of the risk free rate. You give up this return, however, if you decide to hold and pay the convenience yield.
How could you have a negative lease rate in practice? The future contract has a lower PV as it includes the PV of lease rate costs that the person expects to receive. If you do not lend the commodity and hold physical you do not earn the lease rate. Lease rate can be calculated as R continuously compounded - LN 1/T (F/S)
It’s just that the convenience yield for physical gold is high, so it has a positive lease rate. Synthetic gold s becomes f^(1+rf) Physical gold s becomes f^(1+rf-c) (which is lower)
BTON04 Wrote: ------------------------------------------------------- > I understand lease rate = storage cost- > convienence yield but not sure how to make sense > of the rest. Actually lease rate = convenience yield - storage cost
Paraguay Wrote: ------------------------------------------------------- > How could you have a negative lease rate in > practice? > Since lease rate = convenience yield - storage costs, you could have a negative lease rate if storage costs were so high as to exceed convenience yield > The future contract has a lower PV as it includes > the PV of lease rate costs that the person expects > to receive. If you do not lend the commodity and > hold physical you do not earn the lease rate. > > Lease rate can be calculated as R continuously > compounded - LN 1/T (F/S) Just a correction to your formula: lease rate = continuous r - (1/T)*(ln (F/S))
BTON04 Wrote: ------------------------------------------------------- > So it states, Synthetic gold is preferred to > holding physical gold when we have a positive > lease rate. > > Trying to understand the intuition behind the > same. > According to Schweser, “by holding physical gold, you sacrifice the lase rate and incur storage costs.” So by Schweser’s reasoning, if you are lending out gold, then you have synthetic gold. If you are not lending out gold, you have physical gold. So synthetic gold is preferable because you earn some money by lending it out.
Thanks for all the responses (and correction to my formula).