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

The one-year futures price of a commodity is 72 and the two-year futures price is 71. The risk-free rate is 3% and storage costs are 1% per year, both continuously compounded. Assuming the convenience yield is constant over the second year, what is the convenience yield implied for that year?

The implied convenience yield is about 5.40%. The futures curve falls from 72 to 71, so the net cost of carry over the second year is ln(71/72), or -1.40%. Since r plus u is 4%, the convenience yield must be 4% plus 1.40%.

  1. A5.40%Correct
  2. B2.60%
  3. C4.00%
  4. D1.40%

Explanation

For the second year, F2 = F1·e^((r+u-y)·1). So ln(71/72) = -0.013986 = 0.04 - y. Then y = 0.04 + 0.013986 = 5.40%. Using 0.04 - 0.014 gives 2.60%, which is a sign error. Ignoring the price change gives 4.00%.

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