Convenience yields

This paper revisits the notion of a convenience yield in the context of modern option pricing theory. We show that, with a proper specification of the cash flows to holding a commodity, a convenience yield as a separate concept does not exist. Rather, a convenience yield is best viewed as a label given to certain cash flows generated from storing a commodity. In particular, it represents the payoffs from two embedded options which we call the scarcity and usage options. This characterization of a convenience yield is new to the literature, although consistent with its existing interpretations and uses.