Review of Derivatives Research

, Volume 13, Issue 1, pp 25–43

Convenience yields

Article

DOI: 10.1007/s11147-009-9042-5

Cite this article as:
Jarrow, R.A. Rev Deriv Res (2010) 13: 25. doi:10.1007/s11147-009-9042-5

Abstract

This paper revisits the notion of a convenience yield in the context of modern option pricing theory. We show that, with a proper specification of the cash flows to holding a commodity, a convenience yield as a separate concept does not exist. Rather, a convenience yield is best viewed as a label given to certain cash flows generated from storing a commodity. In particular, it represents the payoffs from two embedded options which we call the scarcity and usage options. This characterization of a convenience yield is new to the literature, although consistent with its existing interpretations and uses.

Keywords

ForwardsFuturesCommoditiesOption pricingContangoBackwardation

JEL Classification

G13G12

Copyright information

© Springer Science+Business Media, LLC 2009

Authors and Affiliations

  1. 1.Johnson Graduate School of ManagementCornell UniversityIthacaUSA