Example
A trader has observed that the price of 6-month gold futures price (F) is $1,300 per troy ounce, whereas the spot price (S) is $1,371 per troy ounce. The (not compounded) borrowing rate for a 6-month loan is 3.5% per annum, and storage cost for gold is negligible (0%). Since we know we have the relation:
What is the convenience yield implied by the futures price?
From the formula above, we isolate the convenience yield, and we obtain:
(per annum, not compounded)
For information, if we had a continuously compounded 6-month borrowing rate and if we were looking for the continuously compounded convenience yield, we would have the formula:
And the convenience yield would therefore be:
(per annum, continuously compounded)
Read more about this topic: Convenience Yield
Famous quotes containing the word example:
“Our intellect is not the most subtle, the most powerful, the most appropriate, instrument for revealing the truth. It is life that, little by little, example by example, permits us to see that what is most important to our heart, or to our mind, is learned not by reasoning but through other agencies. Then it is that the intellect, observing their superiority, abdicates its control to them upon reasoned grounds and agrees to become their collaborator and lackey.”
—Marcel Proust (1871–1922)