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:
“... instead of being a help meet to man, in the highest, noblest sense of the term, as a companion, a co-worker, an equal; she has been a mere appendage of his being, an instrument of his convenience and pleasure, the pretty toy with which he wiled [sic] away his leisure moments, or the pet animal whom he humored into playfulness and submission.”
—Angelina Grimké (1805–1879)
“Why do I yield to that suggestion
Whose horrid image doth unfix my hair
And make my seated heart knock at my ribs
Against the use of nature?”
—William Shakespeare (1564–1616)