What does Convenience Yield mean?
The additional advantage that an investor may derive from holding the commodity rather than a futures position in the same underlying asset. This is applicable for consumption asset. Holders of a consumption asset may obtain some benefits from physically holding the asset as inventory. It ensures continuity in production process or may generate profit from temporary shortages before maturity date of equivalent futures contract.
Futures Knowledge Explains Convenience Yield
The benefit of convenience yield is associated with physically owning a commodity, rather than owning a futures contract for that particular commodity. For example, oil, a consumption asset, has a convenience yield because the holder of the oil inventory can sell at higher prices during shortages. However, the convenience yield cannot be calculated directly and has only an implied value and depends on the probability of future events.