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FRM Part I · FRM Exam Part I · Pricing Financial Forwards and Futures

A commodity has a spot price of 60 and a six-month forward price of 61. The risk-free rate is 5% and storage costs are 2% of the price per year, both continuously compounded. Which annualized convenience yield is implied by these prices?

The implied convenience yield is about 3.69%. The annualized cost of carry implied by the prices is ln(61/60) divided by 0.5, or 3.31%. The convenience yield is the full carry r plus u, which is 7%, less that figure.

  1. A3.69%Correct
  2. B1.69%
  3. C10.31%
  4. D7.00%

Explanation

F = S·e^((r+u-y)T), so ln(61/60) = 0.016529 = (0.07 - y)(0.5). Then 0.07 - y = 0.033058, which gives y = 3.69%. Leaving out storage gives 1.69%. Adding the forward's implied rate instead of subtracting gives 10.31%.

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