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The dollar’s ”Convenience Yield”

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  • Robe, Michel A.

Abstract

I link deviations from forward-spot parity for currencies and commodities. The key is to think of the U.S. dollar as a “commodity.” When commodity spot prices are too high compared to futures, arbitrageurs will short the commodity and bank dollars. When physical scarcity constrains commodity borrowing, the result is a positive convenience yield. In the currency space, it is the dollar itself that needs to be shorted, with proceeds converted spot and deposited in foreign currency. When dollars are hard to borrow, covered interest parity (CIP) deviations arise. Thus, a negative “cross-currency basis” is the U.S. dollar’s positive convenience yield.

Suggested Citation

  • Robe, Michel A., 2022. "The dollar’s ”Convenience Yield”," Finance Research Letters, Elsevier, vol. 48(C).
    • Handle: RePEc:eee:finlet:v:48:y:2022:i:c:s1544612322001477
    DOI: 10.1016/j.frl.2022.102858
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    More about this item

    Keywords

    CIP; Cross-currency basis; Scarcity; Convenience yield; Commodities;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices

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