having troubles understanding the meaning of the lease rate…
That’s an area I still need to put in some time reviewing. I did ‘follow’ this thread a while back, but haven’t had a chance to dig into it. http://www.analystforum.com/phorums/read.php?13,948704
thx bankin, guess i should’ve done a search first!
lease rate = convenience yield - storage cost.
lxwqh Wrote: ------------------------------------------------------- > lease rate = convenience yield - storage cost. I have asked this question two times and never got an answer. Are you solid on this lxwqh? I thought the same thing.
100%.
Yes confirm lxwqh 100% as well! Formula becomes: F=Se^(rf-lease rate)^t
Finally!! Thanks.
Also, for financials: R-g where r is expected return for risk level - expected growth. Basically if it’s going to appreciate enough to compensate you for the riskiness of ownership then the lease rate is neglidgable. However, since expected growth is not observable, it’s more of a theoretical thang.
When the lease rate > Rf. We will be in backwardation. Downward sloping forward curve.
Meaning convenience yeild outweighs interest & storage correct?
Black Swan Wrote: ------------------------------------------------------- > Meaning convenience yeild outweighs interest & > storage correct? Yeah. That is the only way the FP could be lower than Spot as FP=So*e^(Rf+storage-convenience yield)t or FP=So*e^(Rf-lease rate)t Edit: had some signs wrong.
Oh, sh*t. We rollin’
While we are at it: Se^(Rf+Storagecost-convenienceyield)^t <=F<= Se^(Rf+Storagecost)^t Now we’ve killed this b*atch!
Aww yeah… range for no arbitrage pricing…
A lease rate can be a + or a - to the forward price, depending on the magnitude of the two components of a lease rate: “storage costs” and “convenience yield”. Storage costs push the forward price in the direction of contango (a higher forward price than the spot price). Storage costs are costs to the holder of the commodity. So for high storage costs the forward price would be driven up to compensate the holder. Convenience yield is the price the holder of the commodity is willing to pay for the convenience of holding the commodity (think a commercial user that needs constant access). A high lease rate (higher than the risk-free rate) would lead to backwardation, where the forward price is less than the spot price. A lease rate that is lower than the risk free rate would result in contango. “The lease rate on a commodity is the interest rate (ie return) the holder of a commodity would require to lend it out, and it is analogous to the dividend yield on a stock that has been loaned out for a short sale.” - Schweser So the holder can require a positive return if there is a “convenience yield” (similar to a divedend), or the holder can require a negative return if there are “storage costs”. The lease rate would be the net of those two aspects.
Dwight Wrote: ------------------------------------------------------- > A high lease rate (higher than the risk-free rate) > would lead to backwardation, where the forward > price is less than the spot price. A lease rate > that is lower than the risk free rate would result > in contango. Actually now I am not sure about this part. Does anyone know if this is true? I’m having trouble putting together the logic.
Dwight Wrote: ------------------------------------------------------- > Actually now I am not sure about this part. Does > anyone know if this is true? I’m having trouble > putting together the logic. FP=So*e^(Rf+storage-convenience yield)t or FP=So*e^(Rf-lease rate)t Based on the formula I think it has to be true.
mwvt9 Wrote: ------------------------------------------------------- > Dwight Wrote: > -------------------------------------------------- > ----- > > Actually now I am not sure about this part. > Does > > anyone know if this is true? I’m having > trouble > > putting together the logic. > > FP=So*e^(Rf+storage-convenience yield)t or > FP=So*e^(Rf-lease rate)t > > Based on the formula I think it has to be true. Yep it’s right thanks. I couldn’t get my head around it, was giving me a headache. FP=So*e^(Rf-lease rate)t e^0 = 1 e^[any negative number] < 1 e^[any positive number] > 1 So if the lease rate is greater than the RFR then we will be multiplying the spot rate by a number less than one to get the forward rate. So the forward rate will be less than the spot, ie backwardation. If the lease rate is smaller than the RFR then we will be multiplying the spot rate by a number greater than one to get the forward rate. So the forward rate will be greater than the spot, ie contango.
mwvt9 Wrote: ------------------------------------------------------- > Dwight Wrote: > -------------------------------------------------- > ----- > > Actually now I am not sure about this part. > Does > > anyone know if this is true? I’m having > trouble > > putting together the logic. > > FP=So*e^(Rf+storage-convenience yield)t or > FP=So*e^(Rf-lease rate)t > > Based on the formula I think it has to be true. Yeah, I second that. I’m thinking about it this way: If you will pay almost any price to own the physical commodity, then that means you have a really high convenience yield. If it’s so high that it dominates the Rf and storage costs, then you’re probably bidding the spot price so high that you have backwardation. Also, for the overall control of a market in a commodity: If Users and Speculators in control = contango If Producers (Owners) and Hedgers in control = backwardation I was thinking that the control scenarios didn’t make sense at first when compared to my convenience yield example, but then it clicked. The owner of the commodity selling it to the user(s) with such a high convenience yield has control of that market.