What is a Convenience Yield?

The convenience yield associated with a given good has to do with the degree of benefit or premium that is derived from directly owning that particular good. The convenience yield does not address the benefits or advantages of holding a contract on the goods, or some sort of derivative product related to the good. From this perspective, this means that a convenience yield is based on actual possession, and not on owning a futures contract or some other arrangement.

Owning a good may or may not actually present the most advantageous situation for an investor. However, there are certainly situations that may occur where direct ownership provides a level of benefit that could not be derived from having an option of some sort. This can be especially true when it comes to commodities.

Owning goods such as basic food products can lead to a substantial convenience yield under certain circumstances. For example, owning actual bales of wheat or storehouses of corn could become highly profitable, in the event that a drought or some other natural disaster destroyed huge amounts of the commodity. This type of situation often leads to an increase in demand that drives up the prices that consumers are willing to pay for the limited commodity. When an investor owns actual product that can now be sold at market, there is an opportunity to realize a substantial return on the investment.

Calculating the convenience yield on a given product involves careful consideration of current market conditions. This will set the stage for choosing to make an investment in the commodity. At the same time, a number of factors will be addressed in the task of projecting future performance. If there are some indications that political or natural situations will lead to high demand with little supply within a reasonable time frame, direct ownership rather than futures options may be the right choice. When this proves to be the case, the investor will enjoy a high level of convenience yield on the initial investment and any expenses incurred to take possession and store the goods until the resale takes place.