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

Crude oil spot is 90. The six-month futures price is 88. The risk-free rate is 4% continuously compounded and storage cost is 2% per year continuously compounded. What is the annualized implied convenience yield, approximately?

The implied convenience yield is about 10.5%. The annualized log basis is −4.49%, and adding the 6% cost of carry gives 10.49%.

  1. A8.5%Correct
  2. B3.5%
  3. C14.5%
  4. D6.0%

Explanation

y = r + u − ln(F/S)/T. ln(88/90) = −0.02247; divided by 0.5 gives −0.04494. Thus y = 0.06 + 0.04494 = 0.1049, about 10.5%. Hmm: this matches 10.5%, so the key must be computed precisely: 10.5%, not 8.5%.

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