MIS 4500 Lecture Notes - Convenience Yield, Forward Price, Contango
Document Summary
Commodity swaps: fixed price of swap is weighted average of corresponding forward prices. Because fixed swap payment equal, while the futures prices vary, the mismatch creates a borrowing/lending component. Synthetic commodity: long forward plus zero coupon bond w/ face value equal to forward price. Link b/w expected commodity price and forward price: Different prices in summer and winter and in night and day. Cash and carry arbitrage: borrow cash, buy commodity, lend commodity and short forward. Reverse cash and carry arbitrage: short commodity, lend cash, long forward. Contango occurs when lease rate is less than risk-free rate; Backwardation occurs when lease rate is greater than risk-free rate. Forward price with storage costs (like negative dividend; applies only when storage occurs): Easily storable; often sold certificated; has lease rate: use lease formula to determine lease rate; synthetic gold generally preferable way to obtain exposure. Harvested in u. s. from sept to nov.