Lesson 5 of 6 · All lessons in this module
- Arbitrage and the law of one priceVideo lesson
- Replicating a forward commitmentVideo lesson
- Exploiting a mispriced forward, and the role of r and T
- The cost of carry: income and costs of owning the underlyingVideo lesson
- Commodities, convenience yield and carry by asset classVideo lesson
- FX forwards: carry as an interest rate differential
Lesson 5 of 6 · 11 min
Commodities, convenience yield and carry by asset class
Physical commodities carry storage and insurance costs that raise the forward price, while a convenience yield from holding scarce stock can pull it back down.
In short
- Commodities carry costs that financial assets do not: storage, insurance, transport and, for soft commodities, spoilage.
- These costs raise the forward price: . Higher storage costs widen the gap between forward and spot.
- A convenience yield is a non-cash benefit of holding the physical commodity, typically when inventories are low.
- A forward price well below the full-carry no-arbitrage price hints at a convenience yield.
- Each asset class has its own carry: dividends for equities, coupons or interest for bonds, the rate differential for FX, storage and convenience yield for commodities.
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