A Convenience Yield Approximation Model for Mean‐Reverting Commodities

Abstract

Standard option‐based approximations for convenience yields make use of the assumption that commodity spot prices follow a geometric Brownian motion. While there is some empirical support for this assumption, prices of a wide variety of (agricultural) commodities mean revert. Using a mean‐reverting spot price process we derive a novel convenience yield approximation analytically. It corresponds to the difference between the present values of two floating‐strike Asian options written on the spot and the futures prices, respectively. Using natural gas spot and futures price data from four different trading locations, we compare convenience yield estimates derived from existing approximations to those of our new measure. We find that convenience yield estimates vary substantially across approximation methods and that differences can be attributed to the cost of carry and the moneyness of the options. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:625–654, 2015

Spot and Futures Markets Linkages: Does Contango Differ from Backwardation?

“…Later research by Dockner, Eksi and Rammerstorfer (), for commodities that exhibit mean reversion, discusses the obtainment of convenience yields by means of arithmetic‐ and geometric‐mean Asian options. This article sticks to Heaney's approximation because metals spot and futures prices follow unit‐root processes, and because it provides a reasonably good fit to actual futures prices, as discussed later.…”

Analysis of the Storage Theory on the Basis of Future Soybeans Contracts in Brazil

“…A análise realizada testou a base como variável dependente, sendo explicada pelo custo de oportunidade do capital e o benefício de conveniência. A principal relação observada é de que a base varia diretamente proporcional aos estoques e ao custo de oportunidade do capital, e inversamente proporcional ao benefício de conveniência, assim como observados nos trabalhos de Fama e French (1987), Milonas e Thomadakis (1997), Nielsen e Schwartz (2004), Nakajima (2015), Joseph, Irwin e Garcia (2015), Dockner, Eksi e Rammerstorfer (2015), Milonas e Paratsiokas (2017), Kim, Kim e Heo (2017) e Nakajima (2017), além do trabalho brasileiro desenvolvido recentemente por Pinto (2015).…”

Approximation for Convenience Yield with Mean-Reverting Commodity Price

“…The differences about the structural properties of the approximation measures have been discussed in Dockner, Eksi and Rammerstorfer (2015) [10]. The traditional approach requires data for inventory costs, while the option- based approaches require the estimation of the spot and futures prices.…”