Convenience yield
Definition · Level 10 · Derivatives pricing
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Benefit of physically holding a commodity (keeping a refinery running, avoiding a stock-out). It lowers the forward and drives backwardation: F = S·e^((r + u − y)T).
Example
Brent spot 85, 1-year 79 → the market is paying up for prompt barrels.
Where Tradecraft teaches it
Level 10 · Derivatives pricing, in the lesson “Forwards & futures: pricing by carry”: Price equity, FX and commodity forwards from the cost of carry, and know when futures differ.
Related terms
- Forward pricePrice fixed today for delivery at a later date, set by what it costs to buy and hold the asset until then — not a forecast.
- Futures convexity adjustmentGap between a futures price and the matching forward caused by daily margining when the underlying moves with rates.
- Implied dividendDividend level backed out of futures or put-call parity quotes — what the market is pricing, which can differ from analyst forecasts.
- 0.4 ruleAt-the-money-forward call or put ≈ 0.4 × S × σ × √T (small dividends, modest σ√T), because 1/√(2π) ≈ 0.4.
- Arbitrage boundsPrice limits any option must respect or someone locks in riskless profit: call ≤ S, European put ≤ K·e^(−rT), call ≥ max(0, S − K·e^(−rT)) without…
- Asian optionAverage-price option: payoff on the average over a set of fixings.