Convenience yield
The benefit of holding the physical commodity rather than a futures contract, such as keeping production running through a shortage. It lowers futures prices relative to spot and is largest when inventories are tight.
Where you will meet it
Convenience yield appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Explain carrying costs and how they shift the forward price
“Storage and insurance raise the forward price because the seller must be compensated for carrying the asset; dividends, coupons and convenience yield lower it because holding the spot asset confers a benefit the forward holder does not receive.”
- Explain how valuing commodities differs from valuing equities and bonds
“Futures on commodities are priced from spot plus the cost of carry, so the futures price is roughly F = spot × (1 + financing rate) + storage costs − convenience yield.”
- Analyse how spot and futures prices relate when markets are in contango and when they are in backwardation
“Under the theory of storage, contango is normal for goods with ample inventory, because a deferred price must cover financing and storage costs; backwardation appears when stocks are scarce and holders value having the physical good now, its convenience yield.”
- Contrast theories explaining commodity futures returns
“The theory of storage ties the curve to inventory: futures = spot × (1 + r) + storage − convenience yield.”
Practise it
Practise convenience yield until it is automatic: questions that explain every wrong option.
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