A convenience yield is an adjustment to the cost of carry in the non-arbitrage pricing formula for forward prices in markets with trading constraints.
Let be the forward price of an asset with initial price and maturity . Suppose that is the continuously compounded interest rate for one year. Then, the non-arbitrage pricing formula should be
However, this relationship does not hold in most commodity markets, partly because of the inability of investors and speculators to short the underlying asset, . Instead, there is a correction to the forward pricing formula given by the convenience yield . Hence
This makes it possible for backwardation to be observable.
Read more about Convenience Yield: Example, Why Should A Convenience Yield Exist?
Famous quotes containing the words convenience and/or yield:
“Your favor containing the question, as to whether I consider myself a new woman is before me. As a rule I do not consider myself at all. I am, and always have been a progressive woman, and while never directly attacking the conventionalities of society, have always done, or attempted to do those things which I have considered conducive to my health, convenience or emolument ...”
—Belva Lockwood (18301917)
“The field of the poor may yield much food, but it is swept away through injustice.”
—Bible: Hebrew, Proverbs 13:23.