CMFAS CM-SIP Derivatives — Futures & Forwards question: convenience yield on a physical commodity refers

CMFAS CM-SIPDerivatives — Futures & Forwards

A 'convenience yield' on a physical commodity refers to:

A the interest earned on cash posted as initial margin with the clearing house.
B the storage and insurance cost saved by choosing not to hold the physical asset.
C the exchange fee rebate paid to high-volume traders in the commodity contract.
D the benefit of holding the physical asset, which lowers the fair forward price.

Show the answer and explanation

Answer: D. the benefit of holding the physical asset, which lowers the fair forward price.

Convenience yield is the non-cash benefit of holding the physical commodity (e.g. to keep production running); like an income yield it lowers the fair forward and, when high, can push futures below spot into backwardation.

Common mistake

Confusing convenience yield with margin interest or storage savings rather than the benefit of physical possession.

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CMFAS CM-SIP Derivatives — Futures & Forwards question: convenience yield on a physical commodity refers

Answer: D. the benefit of holding the physical asset, which lowers the fair forward price.

Common mistake

Related CMFAS CM-SIP questions

CMFAS CM-SIP Derivatives — Futures & Forwards question: convenience yield on a physical commodity refers

Answer: D. the benefit of holding the physical asset, which lowers the fair forward price.

Common mistake

Related CMFAS CM-SIP questions