What is convenience yield?

Convenience yield is the benefit or premium associated with holding an underlying product or physical good, i.e. in spot, rather than the derivative or futures contract of the underlying. What happens when convenience yield increases?

What is the difference between the first purchase price and convenience yield?

If there’s a sudden drought, and the need for wheat increases, the difference between the first purchase price of the wheat versus the price after the shock would be the convenience yield. The storage of a physical good or commodity closely relates to the convenience yield of products.

Do ethical investments have a convenience yield?

Recent developments in ethical investments may have created similar effects. The concept of a convenience yield first arose in the context of commodity pricing. For example, we might find that a commodity had the following prices: which in this case gives a convenience yield around 2%.

Should you invest in a convenience yield or a futures contract?

However, it's important to remember that any value you place on owning a product outright, compared to a futures contract, depends on future events that cannot be guaranteed. That means that the convenience yield's value can only be implied – as always, there's still a risk it won't be profitable.