Question

18. The crude oil futures price expiring in 9 months from now is $120 while the spot price of crude oil is $115. If the risk-free rate is 5% and the storage cost yield is 2%, both continuously compounded annual rates, what is the implied convenience yield of the crude oil?

    A. 1.21% B. 1.28% C. 1.33% D. 2%

    E. None of the above

Answer 1

F=S*(e^((r+s-c)*t))

F= Future price =$120

S=Spot Price=$115

r= Risk Free Rate=0.05 (continuously compounded)

s=Storage cost yield=0.02(Continuously compounded)

c=Convenience yield(Continuously compounded)

t =time period in years=(9/12)=0.75

120=115*(e^((0.05+0.02-c)*0.75))

120=115*(e^((0.07-c)*0.75))

c=0.07-(1/0.75)*ln(120/115)

c=0.07-(1/0.75)*ln(1.043478)

c=0.07-(0.04256/0.75)

c=0.07-0.056746

c=0.0133

Implied Convenience Yield=c=0.0133

Implied Convenience Yield=1.33%

C. 1.33%