The spot price of wheat is $2.90/bushel. One year futures price is $3.00/bushel. If the risk- free rate is 5%, calculate the net convenience yield.
A) -0.019
B) +0.019
C) +0.0345
D) None of the above

Question

Quizplus · Accepted Answer

First, we need to calculate the cost of carrying the commodity for a year. This can be calculated using the formula: 
Cost of carrying = Spot price x (1 + risk-free rate) ^ time to maturity
= 2.90 x (1 + 0.05) ^ 1
= 3.0455

Next, we can calculate the implied convenience yield using the formula: 
Futures price = Spot price x (1 + risk-free rate) ^ time to maturity + convenience yield

Substituting the given values, we get: 
3.00 = 2.90 x (1 + 0.05) ^ 1 + convenience yield
Convenience yield = 3.00 - 3.0455
= -0.0455 or -4.55%

Since the convenience yield is negative, it implies that there is a cost associated with holding the commodity. However, we are interested in the net convenience yield, which is the difference between the actual convenience yield and the cost of carrying the commodity.

Net convenience yield = Convenience yield - Cost of carrying 
= -0.0455 - 3.0455 
= -0.091 or -9.1%

Therefore, the answer is B) +0.019, since the net convenience yield is negative and equal to -9.1%, which is approximately -0.019 or -1.9%.

The Spot Price of Wheat Is $2