What is the effect of convenience yield on the cost of ownership for physical assets?

Convenience yield represents the non-monetary benefits of holding a physical asset, such as inventory or commodities, which make ownership advantageous over simply holding a financial contract or derivative. This yield often reflects the benefits derived from having the physical asset readily available for use, ensuring operational readiness or meeting immediate demand.

When convenience yield is high, it indicates that owning the physical asset provides significant advantages compared to alternative options, such as purchasing it later or relying on futures contracts. These advantages effectively reduce the total cost of ownership, as the owner is deriving benefits that lessen the financial burden of holding that asset. For instance, the owner can avoid potential shortages, benefit from price fluctuations, or have the ability to fulfill immediate delivery needs.

Consequently, when analyzing the cost of ownership, a high convenience yield will reduce the overall expenses associated with owning the asset, as the benefits associated with physical possession provide intrinsic value that offsets ownership costs. This understanding of convenience yield plays an important role in evaluating investment decisions related to physical assets.