Contractual provisions of the instrument là gì
What is a Convenience Yield?A convenience yield is the benefit or premium associated with holding an underlying product or physical good, rather than the associated derivative security or contract. Show
Sometimes, as the result of irregular market movements such as an inverted market, the holding of an underlying good or security may become more profitable than owning the contract or derivative instrument due to its relative scarcity versus high demand. Consider purchasing physical bales of wheat rather than wheat future contracts. If there’s a sudden drought, and the need for wheat increases, the difference between the first purchase price of the wheat versus the price after the shock would be the convenience yield. Convenience Yield ExplainedThe storage of a physical good or commodity closely relates to the convenience yield of products. However, there’s an inverse correlation between commodity prices and storage levels. Based on the levels of supply and demand, when storage levels of a commodity are scarce, the commodity's price tends to rise. The opposite is also true; when a commodity's storage levels are plentiful, the price typically decreases. Convenience yields tend to exist when the costs associated with physical storage, such as warehousing, insurance, security, etc., are relatively low. Convenience Yield and Cost of InsuranceInvestors can calculate the convenience yield as the cost of insurance against price risk. The formula is calculated by multiplying the price of a front-month futures contract by the capital cost of money that is tied up in inventory, or Euler's number raised to the borrowing rate multiplied by the time to maturity, then adding the storage cost and subtracting the price of the futures contract for the back-month contract. Next, divide this calculation by the price of the front-month futures contract and add one to the quotient. The resulting value is raised to the power of 365 divided by the number of days to maturity. Finally, subtract one from the resulting value. Key Takeaways
Real World Example of Convenience YieldThe convenience yield is simple to calculate if a commodity's future price, spot price, borrowing rate and time to maturity are known. The futures price is calculated as the spot price multiplied by Euler's number, or the mathematical constant e, raised to the power of the difference between the borrowing rate and the convenience yield multiplied by the time to maturity. Consequently, the convenience yield is solved to be the difference between the borrowing rate and one divided by the time to maturity multiplied by the natural log of the futures price divided by the spot price. This formula is used for continuously compounding rates and yields. For example, let’s say that a trader wishes to calculate the convenience yield of West Texas Intermediate (WTI) crude oil for delivery one year from today. Assume that the annual borrowing rate is 2%, the spot price of WTI crude oil is $50.50 and the futures price of crude oil contracts expiring one year from today is $45.50. Therefore, the convenience yield is calculated to be 12.43% continuously compounded per year, or 0.02 - (1/1) * LN($45.50/$50.50). What Is a Contract Provision?A contract provision is a stipulation within a contract, legal document, or a law. A contract provision often requires action by a specific date or within a specified period of time. Contract provisions are intended to protect the interests of one or both parties in a contract. Key Takeaways
How a Contract Provision WorksContract provisions can be found in a country's laws, in loan documents, and in contract agreements. They also can be found in the fine print accompanying purchases of some stocks. For example, an anti-greenmail provision is a type of contract provision that is contained in some companies' charters that prevents the board of directors from paying a premium to a corporate raider to drop a hostile takeover bid. In loan documents, a loan loss provision is a type of contract provision that details an expense set aside to allow for uncollected loans or loan payments. This provision is used to cover a number of factors associated with potential loan losses. Special ConsiderationsMany laws are written with a sunset provision that automatically repeals them on a specific date unless legislators reenact them. A sunset provision provides for a repeal of the entire law—or sections of the law—once a specific date is reached. Sunset clauses can help the general public in a few ways. What may be the most common is when a government body writes a provision into law that benefits the public during a certain period of time, usually during a period of specific party power. When the power dynamic shifts, the clause may not be in the best interest of the public anymore, and will be triggered and may free the public from unwanted repercussions from a power shift, such as a tax increase or regulation. For example, the National Security Agency’s (NSA) authority to collect bulk telephone metadata under the USA PATRIOT Act expired at midnight on June 1, 2015. Any investigations started before the sunset date was allowed to be completed. Many sunsetted portions of the Patriot Act were extended through 2019 with the USA Freedom Act. However, the provision allowing the collection of massive phone data by government agencies was replaced with a new provision that this data must be held by phone providers. This practice of sunsetting has its parallel in business. For example, a sunset provision in an insurance policy limits a claimant’s time to submit a claim for a covered risk. If the claimant does not act within the defined period, the right to make the claim is forfeited. Example of a Contract ProvisionOne of the most familiar uses of a contract provision is a bond’s call provision. A bond's call provision refers to a specific date; after this date, the company may recall and retire the bond. The bond investor can turn it in for payment of the face amount (or the face amount plus a premium). For example, a 12-year bond issue can be called after five years. That first five-year period has a hard call protection. Investors are guaranteed to earn interest until at least the first call date. When an investor buys a bond, the broker typically provides the yield to call as well as the yield to maturity. These two yields show the bond’s investment potential. If a bond has a soft call provision, the procedure will go into effect after the hard call provision period passes. Soft call protection is typically a premium to face value that the issuer pays for calling the bond before maturity. For example, after the call date is reached, the issuer might pay a 3% premium for calling the bonds for the next year, a 2% premium the following year, and a 1% premium for calling the bonds more than two years after the hard call expires. What Are Some Typical Contract Provisions?While all contracts will vary depending on the particular circumstance around what the contract is for and who is involved, nearly all will have at least some of the following basic provisions:
What Is the Difference Between a Contract Provision and Clause?A provision in a contract stipulates a condition or requirement. A clause is a section or subsection written into a contract, which may contain one or more provisions within it. What Are Sunrise and Sunset Provisions?A sunset provision automatically allows for a contract or parts of it to be phased out or automatically terminated at some point in the future. A sunrise provision extends coverage to events occurring before the contract was signed, allowing the insured to keep a level of affordable coverage. |
