Convenience Yield

CFA Level II Alternative Investments
#1

Need some help here.

According to Schweser, convenience yield is the benefit from holding the commodity rather than being long the equivalent futures. However, there is an inverse relationship between inventory levels (which I guess imply high physical commodity holdings) and convenience yield: the higher the inventory, the lower the convenience yield?

I don’t get it. Thanks!

#2

Diminishing marginal utility: if you’re a baker and you have 10 lbs. of flour on hand, an extra pound of flour is worth a lot (especially at 4:00 in the morning, when you’re making muffins for the breakfast crowd); if you have 1,000 lbs. of flour on hand, an extra pound of flour isn’t worth much more.

#3

The higher Convenience yield, the higher roll yield?

#4

Ceteris paribus, yes.

#5

Nice example.

#6

Thanks.

#7

i think the explaination is not so obvious. google leads you to lots of academic research that tries to measure convenience yield. my conclusions were,

gas - no change, either on inventory or demand/seasonality

oil - yield slightly lower with high inventories, no seasonality

soft commodities - lower with high inventories (at end of growing season)

so main thing is the convenience yield is unrelated to demand, and for softs there is a lot of vertical integration in transport/storage/marketing - and - softs are rarely in backwardation - and - it’s difficult to speculate.

thats all I have to say, it’s yet another topic cfai need to get rewritten by an expert.