L1 Practice

[dthigale]

HI David,

Q31.5 (worth doing).

I found the implied convenience yield using simple eqation. Is there any bug?

0.762926 ( Forward price from solution 31.2) * e^-x = 0.7415 say x is the convenience yield

e^-x = 0.7415 / 0.762926

-x = LN (0.7415/0.762926)

x = 0.02848

Annulized = 0.02848 * 4 = 11.3944 %

I thought that its easier.

Thanks.

-D

 

[David Harper CFA FRM]

Hi Dinesh,

Yes, much easier (you gotta love continuous compounding). Thanks!
I added to the solution @ http://forum.bionicturtle.com/viewthread/2520/

Added the following to 31.5:
Please note easier solution given by Dinesh:
0.762926 ( Forward price from solution 31.2) * EXP(-y) = 0.7415; where (y) is the convenience yield
EXP(-y) = 0.7415 / 0.762926
-y = LN (0.7415/0.762926)
y = 0.02848
Annualized convenience yield (y) = 0.02848 * 4 = 11.3944 %
... this nicely applies elegant property of EXP/LN: EXP(r-y) = EXP(r)*EXP(-y)
... Further, this is a very natural way to treat the convenience yield as it is often solved for: it is the number that explains the difference between the observed forward price and the expected (model) forward price. So, using the observed forward to impute the convenience is consistent with its role as a "plug variable."

 

[dthigale]

Hi David,

Thanks for checking it and for your comments.

Counting down...hope GARP does not mess up Level 1 this time!

Wish us Luck.

-D