The dollar’s ”Convenience Yield”

Michel Robe

Finance Research Letters, 2022, vol. 48, issue C

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.

Keywords: CIP; Cross-currency basis; Scarcity; Convenience yield; Commodities (search for similar items in EconPapers)
JEL-codes: F31 G13 G15 Q02 Q31 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:48:y:2022:i:c:s1544612322001477

DOI: 10.1016/j.frl.2022.102858

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