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

Which statement best describes the convenience yield on a commodity?

Convenience yield is the benefit from holding the physical commodity, such as avoiding stockouts or keeping production going, that a holder of a long futures contract does not receive. It is distinct from storage costs, which raise futures prices, whereas convenience yield lowers them.

  1. AThe benefit that holders of the physical commodity obtain from having it available, which is not enjoyed by holders of a long futures positionCorrect
  2. BThe interest income earned on cash proceeds from selling the commodity forward
  3. CThe cost of storing and insuring the physical commodity, expressed as a percentage of spot price
  4. DThe premium paid by a futures buyer for deferring delivery of the commodity

Explanation

Convenience yield reflects the benefit of owning the physical asset, such as keeping a production process running or profiting from temporary shortages. Futures holders do not receive this benefit. Storage cost is a separate cost of carry component that pushes futures prices up, so option 3 is wrong.

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