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YouTube T3-18: Commodity (eg, gold) lease rate

Nicole Seaman

Director of FRM Operations
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The least rate is the borrowing rate a commodity owner charges if (s)he lends the commodity. The least rate is equal to the convenience yield minus the storage cost: L = y - u. Because if the commodity owner LENDS the commodity, (s)he forgoes storage cost but also the convenience yield. In this way, we can think of the lease rate as a "net convenience yield."

David's XLS is here: https://trtl.bz/2NozX3D

 
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bollengc

Member
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@Nicole Seaman and @David Harper CFA FRM , there is something that is still not 100% clear on my side (but I do not know if it is the right place to post about it)
Because if the commodity owner LENDS the commodity, (s)he forgoes storage cost but also the convenience yield
this means there is a physical transfer by lending/borrowing a commodity? or the lease rate is only there to 'compensate' the occurred costs that are still on the owner/lender's side?

I am taking the example from the study note (T3-FMP-11-Ch11-Commodity-v3 page14/15) on the reverse cash and carry arbitrage.
To short sell a commodity, it has to be borrowed from an owner or lender for which a lease payment has to be made.
And it is also written: the storage cost is ignored as the commodity needs to be stored either by the arbitrageur or the lender.
I understand here that it is still the lender/owner carrying the storage cost -> this is where I am a bit lost with the lender forgoes storage cost (and convenience yield)

thanks for your clarification
Camille
 
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