Convenience yield

A convenience yield is an implied return on holding inventories. It is an adjustment to the cost of carry in the non-arbitrage pricing formula for forward prices in markets with trading constraints.

Let ${\displaystyle F_{t,T}}$ be the forward price of an asset with initial price ${\displaystyle S_{t}}$ and maturity ${\displaystyle T}$. Suppose that ${\displaystyle r}$ is the continuously compounded interest rate for one year. Then, the non-arbitrage pricing formula should be

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