Convenience Yield
The implicit benefit of holding physical inventory of a commodity rather than a futures contract — what justifies backwardation.
Formula
y = r + u − ln(F / S) / T (solved from the carry model)
The convenience yield is the non-monetary benefit that accrues to a holder of physical commodity inventory. A refiner holding crude oil can start a production run immediately; a trader holding a futures contract cannot. This optionality has value.
When inventories are tight and demand is urgent, the convenience yield is high — it can exceed the cost of carry, pushing the market into backwardation. When inventories are ample, convenience yield is low and carry costs dominate, producing contango.
Convenience yield is not directly observable; it is implied by the difference between the theoretical carry-based futures price and the actual futures price: y = r + u − (ln(F/S) / T).
Related Terms
Backwardation
A futures market where near-term contracts trade at a premium to deferred contracts, generating positive roll yield and signalling near-term supply tightness.
AdvancedCarry / Cost of Carry
The net cost of holding a physical commodity position — storage, insurance, and financing minus any income or convenience yield.
AdvancedFutures Curve
The graph of futures prices across successive delivery months for a commodity, revealing whether the market is in contango or backwardation.
IntermediateSpot Price
The current market price at which a commodity can be bought or sold for immediate delivery.
BeginnerStorage Cost
The fees paid to store a physical commodity — tank rental for crude, vault charges for gold — a key driver of contango in storable markets.
Intermediate