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FRM Part I · FRM Exam Part I · Commodity Forwards and Futures

A commodity has spot price USD 50, a risk-free rate of 6% and storage costs of 2% (both continuously compounded, annual), and the 1-year forward price is quoted at USD 52. What is the implied convenience yield (continuously compounded)?

The implied convenience yield is about 4%. The forward implies a net carry of ln(52/50) ≈ 3.92%, while interest plus storage is 8%. The convenience yield is the gap, 8% − 3.92% ≈ 4.1%, because convenience lowers the forward below full carry.

  1. AAbout 4.0%Correct
  2. BAbout 4.2%
  3. CAbout 0.2%
  4. DAbout 7.8%

Explanation

F = S e^((r+u−y)T), so ln(52/50) = 0.03922 = 0.08 − y, giving y = 0.08 − 0.0392 = 0.0408, about 4.1%. The closest option is 4.0%. Option 7.8% wrongly adds y to the carry cost, and 0.2% subtracts incorrectly.

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