Abstract
This study analyzes the relationships of commodity spot and futures prices with convenience yield. Convenience yield is received by the owner of a spot commodity but not by the owner of the right to the commodity (e.g., futures). This is the first study to explicitly model commodity spot and futures prices using firms and speculators (i.e., supply and demand of a commodity). We found that spot and futures prices are related to convenience yield. Based on this we were able to identify the structure of convenience yield, which can be decomposed into two components: yield and cost. When speculators are introduced, the spot commodity price is the discounted futures price minus the present value of the marginal storage cost plus the convenience yield on the spot storage.
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