The benefit of holding a physical commodity rather than a contract on it. It reduces the forward price relative to the cost-of-carry value.
Where you will meet it
Convenience yield comes up in 8 learning outcome notes across the FRM syllabus.
A few of them:
Pricing Financial Forwards and Futures FRM Part I · Financial markets and products
“Storage costs and a convenience yield for physical holders mean arbitrage gives only bounds.”
Commodity Forwards and Futures FRM Part I · Financial markets and products
“The convenience yield is the benefit of owning the physical commodity, such as keeping a plant running or avoiding a stockout, which a forward holder does not get.”
Commodity Forwards and Futures FRM Part I · Financial markets and products
“In words, the forward is spot grown at the risk-free rate r, plus the storage cost rate λ, less the convenience yield c, the benefit that holders of the physical commodity enjoy.”
Commodity Forwards and Futures FRM Part I · Financial markets and products
“The usual error is to use the lease rate where a convenience yield belongs, or to forget to annualise ln(F ÷ S).”
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