Physical gold over synthetic gold (futures)

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yazena

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Why is physical gold more preferred over gold futures if the lease rate is below the cost of storage?
the answer “if the lease rate is less than the cost of storage, the lender will save on the storage cost. ”
then well why is it wrong if the lease rate is higher than storage cost, meaning profiting and not only saving…
Thank you!
 
I believe this was a question on the sample exam and I still don’t understand it.
 
I believe this was a question on the sample exam and I still don’t understand it.
 
Assuming it is correct maybe it means that you will only buy physical if you get compensated more for storage since that will raise the forward price you sell it for.
 
I understood it a little differently.
You as a lender of gold (without the borrower present) would be paying for storage.
If someone borrowed the gold from you - you would no longer be responsible for the storage. (but you still have to pay the borrower a lease rate equal to the storage cost).
So if the lease rate you pay to the borrower is < storage cost that you would have paid - you as a lender are better off on the deal. (and would be better off with physical gold).
 
Gold lenders earn the lease rate. Borrowers of Gold pay the lease rate
Page 174
But the lease rate is reflective of storage costs.
 
write down the formula and check
1. can you earn lease
OR
1. Is there a storage cost
2. Is there a convenience yield
Done and Done.
If you cant figure it out then, then move on in the AM or pick your fav letter out of a,b and c and move.
 
andytrader wrote:
Gold lenders earn the lease rate. Borrowers of Gold pay the lease rate
Page 174
But the lease rate is reflective of storage costs.
Click to expand...
above is incorrect.
read pg 171 middle of page.
Quote:
If you lend the commod- ity, you are saved from having to pay storage cost. Thus, the lease rate should equal the negative of the storage cost. In other words, the lender will pay the borrower!
Click to expand...
I am the gold lender. I lend you (borrower) the gold. I also pay you a lease rate (which you might use to pay the storage company). At the margin - if lease rate = storage cost - I am indifferent. However if the lease cost I pay you (borrower) is lower than the storage cost - I am better off - since between holding the gold and paying storage (which would now be higher) and paying the lease rate - I come out better on the lease rate payment.
 
cpk: sorry wrong. The text is poorly written but meant to mean the lease rate incorporates the storage cost.
so you are saying CFAI made an error on page 174? It is word for word: “The gold lenders earn the lease rate”
(Institute 174)
Institute, CFA. Level III 2013 Volume 5 Alternative Investments, Risk Management, and the Application of Derivatives. John Wiley & Sons P&T, 6/18/2012. <vbk:9781937537371#page(174)>.
you should call CFAI and tell them they made a mistake
 
I am also not trying to be flip but the sample exam also confirms this. You need to decide bwteen owning gold physically or synthetically. If you cant lend it out and earn lease rate then you pay all storage costs but the price you can sell it forward will include that cost so you want lease rate to be lower than storage. Otherwise forward price will incorporate a lease rate that you arent owning so you will be screwed. Remember the formula for forward price. It gets reduced by the lease rate. You want F>Se^(r-d)T
What page 171 is saying is that by lending it you are able to save storage costs because lease rate compensates. Borrower pays you for that “virtual storage”
I will caveat my statement by saying I may be 100% wrong but I cant do better than quote the CFAI text and use answers in mocks as backup. Please prove me wrong but the text on page 171 agrees with the above.
 
Look at it this way, the lender always has to incur storage cost whether it stores or leases to store. So if lease rates are less than self storage, he saves from what market offers as lease rates. So it is better off having physical procession of the commodity
 
Yep, now that I think about it cpk and I were sort of saying the same thing but appraoching it differently.
 
Some confusion might arise because of the fact that the lease rate is earned by different parties depending on whether or not there are storage costs.
If there are no storage costs, the lender earns the lease rate (he must be compensated for loaning it out).
However, if there are storage costs, the lender pays the borrower the lease rate (in this case, the borrower must be compensated for bearing the storage costs).
 
Pad: and what if market lease rates are less than storage costs? Why would I want to own physical gold instead of future?
 
i do not have to store.
I pay the lower lease rate. and I am sure there are borrowers a plenty.
someone else (do not care who) stores.
 
OK, so bottom line is you want physical gold over synthetic if lease is less than storage since you pay lease rate for a storable commodity when it is loaned out.
If lease rates are higher than storage, you rather own the future
 
My understanding is the lease rate is what you gain from leasing the gold out, hence it is substracted from the formula Se^(r+storage-lease). Here where it confused me as to my thought that it is better for the lease rate to be higher than storage for it to make it better to hold physical hold. If it is less than future prices will give us a better return…
 
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