For commodity forwards and futures, which of the following statements is valid?
A) The presence of a convenience yield means that the market will be in contango.
B) Convenience yields may lead to the market being in backwardation.
C) If there are storage costs, the convenience yield is zero-it is no longer convenient to hold the commodity.
D) As supply becomes plentiful, convenience yields will rise.

Question

Quizplus · Accepted Answer

Convenience yields arise from the benefits of holding and using a physical commodity rather than holding a futures contract. When the convenience yield is high, there is a strong demand for physical commodities, and this may lead to a shortage in the spot market, thereby leading to a futures market in backwardation. Conversely, when the convenience yield is low, the market will be in a contango.

For Commodity Forwards and Futures, Which of the Following Statements