Quick ? on cost of carry

[sridhar]

I refer to a slide in the CRAM session (pages don't seem to be numbered when I printed it out...anyway...)

You say: Cost-of-carry = r + u -q

If we are given the convenience yield can we just subtract it from the above to compute the cost of carry?

--sridhar

 

[David Harper CFA FRM]

Yes,
financing (r) and storage (u) will add (+): they are costs incurred by asset owner. Forward must give compensation. They add.

Income (q or ?) or convenience yield (y) are benefits to asset owner. The forward forgoes them and so reduces price. They subtract.

The factors used depend on the commodity, and will be given.

David