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CFA Level I · CFA Level I Exam · Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives

A commodity has a high convenience yield because inventories are scarce. Relative to a market with ample inventories, the forward price is most likely:

The forward price is most likely lower. Convenience yield is a benefit to holders of the physical commodity, so it reduces the net cost of carry. A higher convenience yield therefore lowers the no-arbitrage forward price relative to the spot price.

  1. Ahigher, because convenience yield adds to carry costs
  2. Blower, because convenience yield is a benefit of holding the physical assetCorrect
  3. Cunchanged, because convenience yield affects only the spot price

Explanation

Convenience yield is a non-monetary benefit of holding the physical commodity. It reduces the net cost of carry, so the forward price falls relative to spot. It is not an added cost.

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