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

A one-year crude oil forward is quoted at USD 84.00 while spot is USD 80.00. The risk-free rate is 5% continuously compounded and storage costs are zero. What is the implied convenience yield (continuous, per year), approximately?</br>

The implied convenience yield is about 0.12% per year. The log of 84/80 is 0.0488, and subtracting this from the 5% risk-free rate gives 0.0012. Convenience yield is the amount by which the carry cost exceeds the forward premium observed in the market.

  1. AApproximately 0.12% per yearCorrect
  2. BApproximately 0.00% per year
  3. CApproximately 5.00% per year
  4. DApproximately 0.12% negative, -0.12%

Explanation

F = S*exp((r-y)T) so ln(84/80)=ln(1.05)=0.04879. Then r-y=0.04879, giving y = 0.05-0.04879 = 0.00121, about 0.12%. A negative sign would reverse the relationship, and 5% ignores the forward premium.

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