Convenience Yield
What is a convenience yield?
A convenience yield is the benefit that comes from holding a physical good as inventory rather than as a futures contract. Convenience yields apply to consumption assets, products that are consumed by others rather than held as investments.
Where have you heard about convenience yields?
An example of a product with a high convenience yield is oil. The benefit of owning oil directly means that you can manage its production and reap rewards from shortages, when you can sell for higher prices.
What you need to know about convenience yields...
You might consider buying a good outright if supply is low but demand is high – meaning that there's a good chance you'll reap the benefits. This usually happens in an inverted market.
However, it's important to remember that any value you place on owning a product outright, compared to a futures contract, depends on future events that cannot be guaranteed. That means that the convenience yield's value can only be implied – as always, there's still a risk it won't be profitable.
