Question

A commodity has a spot price of $4750 and the four month futures price is $4645.The four month continuously compounded risk-free interest rate is 5.6 per cent per year. The storage costs for the commodity is 2.6 per cent per year continuously compounded. Calculate the convenience yield on the commodity.

Answer 1

The convenience yield for the commodity is approximately $1280.49.

Step-by-step explanation:

The convenience yield can be calculated using the following formula:

Convenience Yield = (Spot Price - Futures Price) / (Storage Costs + Risk-Free Interest Rate)

Using the given values:

Spot Price = $4750

Futures Price = $4645

Risk-Free Interest Rate = 5.6% per year (continuously compounded)

Storage Costs = 2.6% per year (continuously compounded)

Convenience Yield = ($4750 - $4645) / (2.6% + 5.6%)

Convenience Yield = $105 / 0.082

Convenience Yield ≈ $1280.49