Question

You are interested in entering a futures contract for oil as you suspect the price will be rising in the near future. Oil is currently selling at $44 a barrel and its cost of carry is 3% per annum with continuous compounding. If the future price is 43.8353 for a maturity of 9 months what is the convenience yield?

Answer 1

Cost of Carry = 3 %, Current Spot Price = $ 44, Futures Price = $ 43.8353 and Tenure =9 months or 0.75 years

Let the convenience yield be R

Therefore, Futures Price = Spot Price x EXP[(Cost of Carry - Convenience Yield) x Tenure]

43.8353 = 44 x EXP[(0.03 - R) x 0.75]

(43.8353/44) = EXP[(0.03 - R) x 0.75]

0.99626 = EXP[(0.03 - R) x 0.75]

= [(0.03 - R) x 0.75]

- 0.00375 = 0.0225 - 0.75 R

0.75R = 0.00375 + 0.0225 = 0.02625

R = 0.02625 / 0.75 = 0.035 or 3.5 %