In: Finance
For commodities, the net convenience yield is generally not observable in the market. Consider Brent crude oil, which is relatively easy to transport globally. The 1-year forward price of Brent is $55.86. The spot price of Brent is $50.54. The risk-free interest rate is 3% (per year). Assuming that the net convenience yield is constant over this period; find the net convenience yield implied by these observations.
Forward Price =Spot Price*e^(Rate+Convenience Yield)
55.86=50.54*e^(3%+Convenience Yield)
Convenience Yield =ln(55.86/50.54)-3% =7.01%