Chapter 26 Managing Risk 685
bre44380_ch26_673-706.indd 685 09/30/15 12:09 PM
Figure 26.2 plots the annualized net convenience yield for crude oil since 1990. Notice
how much the spread between the spot and futures price can bounce around. When there are
shortages or fears of an interruption of supply, traders may be prepared to pay a hefty pre-
mium for the convenience of having inventories of crude oil rather than the promise of future
delivery. The reverse is true when storage tanks are full to the brim as in early 2015.
There is one further complication that we should note. There are some commodities that
cannot be stored at all. You can’t store electricity, for example. As a result, electricity supplied
in, say, six-months’ time is a different commodity from electricity available now, and there is
no simple link between today’s price and that of a futures contract to buy or sell at the end of
In February 2015, the spot price of crude oil was $48.97 a barrel and the six-month futures
price was $56.65 per barrel. The interest rate was about .035% for six months. Thus
Ft = S 0 (1 + rf + storage costs − convenience yield)
$56.65 = 48.97(1.00035 − net convenience yield)So net convenience yield was negative, that is, net convenience yield = convenience
yield − storage costs = −.156, or −15.6% over six months, equivalent to an annual net con-
venience yield of −28.8%. Evidently the cost of holding of crude oil inventories was greater
than the convenience yield provided by those inventories. Oil in 2015 was in ample supply
and users had no worries that they would run short in the months ahead.
EXAMPLE 26.2^ ●^ Calculating Net Convenience Yield
● ● ● ● ●◗ FIGURE 26.2
Annualized percentage net convenience yield (convenience yield less storage costs) for crude oil.
Source: http://www.quandl.com.0–20–40–60204060Annualized net convenience yield, %March-83
March-84
March-85
March-86
March-87
March-88
March-89
March-90
March-91
March-92
March-93
March-94
March-95
March-96
March-97
March-98
March-99
March-00
March-01
March-02
March-03
March-04
March-05
March-06
March-07
March-08
March-09
March-10
March-11
March-12
March-13
March-14BEYOND THE PAGEmhhe.com/brealey12eGold convenience
value