2 futures questions includes, actually, however, storage, trying

cfa10yrplan

Since the formula is F = S X e(rf rate+storage costs - conv yield) ...

one would assume the upper bound includes storage cost but not conv yield, and the lower bound includes conv yield but not storage costs, however the lower bound actually includes both (upper does indeed only include storage costs). I have memorized this but don't find it intuitive, if you are trying to get an upper bound, you would assume no conv yield, would you not then assume no storage cost for lower bound?

Also, as interest rates (rf rate) increase, using the formula it obvious futures will increase. If the rate goes higher and futures therefore increases, it would seem like F is increasing greater than S, but this is not the case as basis is not changed by interest rates, only storage costs, transportation costs, and differences in grade.

Why does the basis not change with other factors that affect the futures price, like conv yield and interest rates?

nannan66

no no no please wait hold up mi amigo ....................the bound only exist since not every producer is able to reap convenience yield ...........for example a farmer gets the convenience yield of corn, wheat etc but a watch producer does not vice versa for copper.........so in this case


the range is thus


Se(rf rate+storage costs - conv yield)<F<Se(rf rate+storage costs)



Edited 1 time(s). Last edit at Tuesday, April 12, 2011 at 02:04PM by pimpineasy.

oneboy

you have to pay to store the commodity. - in either case.
so e^(rf + storage) in either case.

if you do get a Convenience yield - that lowers your lower bound, since you benefit from it.

but if you do not - the upper bound is at (rf+storage).

CP

thommo77

It depends on whether you can get the conv yield. 1) the form in business(such as manufacturer) can 2) the investor can't. If the investor buy&hold the commodity, he will request a higher yield(rf+storage) since he can't take the conv yield.