CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

23.4 CONVENIENCE YIELD

All real assets have a convenience yield, which is the benefit that comes from physical possession of an asset. It is literally a measure of the convenience of having the asset available to use. Alternatively, it is a measure of how much a buyer would pay to avoid the inconvenience of constantly ordering new quantities of the asset and worrying that the supply of the asset will not arrive when needed. It is an economic benefit, not a monetary benefit. Continuing the airline example, the convenience yield of having sufficient fuel for an airplane is quite high if the airline has routes that need to be flown. If the airline has more airplanes than it needs, given travel demand (as in October 2001, for example), the convenience yield of available fuel for an additional airplane is quite low, or possibly almost zero.3 However, if the number of airplanes held by an airline is equal to traveler demand, the convenience yield for materials such as jet fuel is quite high, since the production of air travel is impossible without it. Convenience yields vary with the level of inventories. As inventories decline, the convenience yield rises, as consumers will pay more to ensure adequate supplies to operate their businesses.

Measuring the convenience yield of a real asset is difficult, because it differs for every user and may be different for the same user from one day to the next. Alternatively, what can be measured using market prices is the marginal convenience yield, ...