The convenience yield is the difference between the actual yield of a security and the theoretical yield. The actual yield is the return that an investor receives from holding the security, while the theoretical yield is the return that an investor would receive if the security was held in a perfect market.
The convenience yield is often used to describe the yield of a bond, but it can also be applied to other securities, such as stocks and futures contracts.
The convenience yield is important because it represents the true return that an investor receives from holding a security. In a perfect market, all securities would have the same theoretical yield, so the convenience yield would be zero. However, in the real world, markets are imperfect and the convenience yield provides a way to compare the actual return of different securities.
The convenience yield is also known as the risk premium, because it represents the additional return that an investor receives for taking on the risk of holding a security. What is convenience yield CFA? Convenience yield is the theoretical rate of return that an investor would expect from holding a physical commodity rather than a futures contract. The convenience yield is the benefit an investor receives from the direct use or consumption of a commodity. This yield is not realized through the sale of the commodity, but rather through the direct use of the commodity. The convenience yield is also sometimes referred to as the storage cost or the carry cost.
What should a trader do when the one year?
A trader who is long a financial future should do nothing when the contract expires. The contract will automatically be settled at the prevailing market price, and the trader will be required to deliver the underlying asset if the contract is in-the-money, or will receive the underlying asset if the contract is out-of-the-money. If the trader is short the financial future, they should close out their position before expiration to avoid being required to make or take delivery of the underlying asset.
What are the 2 categories of futures trading? Category 1: Financial Futures Trading
Financial futures are futures contracts that are used to speculate on or hedge against the movements in the underlying financial instruments. The most common financial futures are based on interest rates, equity indexes, and foreign currencies.
Category 2: Commodity Futures Trading
Commodity futures are futures contracts that are used to speculate on or hedge against the movements in the underlying commodity prices. The most common commodity futures are based on agricultural products, metals, and energy products.
What are contango and backwardation in futures markets?
Contango and backwardation are two terms used to describe the relationship between the price of a commodity and the price of the corresponding futures contract. If the price of the commodity is higher than the price of the futures contract, the market is said to be in contango. If the price of the commodity is lower than the price of the futures contract, the market is said to be in backwardation.
What does the term convenience yield mean?
Convenience yield is the additional return above the risk-free rate that an investor receives for holding a commodity in inventory. The convenience yield reflects the cost of holding the commodity in inventory, including the cost of storage, insurance, and the opportunity cost of foregone investments.