Reddit

Q.17 Assume that the spot price of petroleum is USD 110 per barrel and the 3-year futures price is 95 per barrel. Suppose further that the present value of storing petroleum for three years is USD 8 and the annually compounded risk-free rate is 6% per year. What is the implied convenience yield? | Financial Risk Manager Part 1 Quiz - LeetQuiz

Explanation:

Convenience yield, Y, should satisfy the equation:

F = (S + U) \times \left(\frac{1 + R}{1 + Y}\right)^T

So that,

Y = \left(\frac{S + U}{F}\right)^{\frac{1}{T}} (1 + R) - 1

Where U is the present value of storage costs, F is the forward price, S is the spot price, R is the risk-free rate (with annual compounding), and Y is the convenience yield

Thus,

Y = \left(\frac{110 + 8^{\frac{1}{3}}}{95}\right)^{\frac{1}{3}} \times 1.06 - 1 = 0.13944

Comments (0)

No comments yet.

Financial Risk Manager Part 1

Get started today

Comments (0)

Get started today

Comments (0)

Q.17 Assume that the spot price of petroleum is USD 110 per barrel and the 3-year futures price is 95 per barrel. Suppose further that the present value of storing petroleum for three years is USD 8 and the annually compounded risk-free rate is 6% per year. What is the implied convenience yield?