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Lease Rates

The lease rate is the periodic payment made by the lessee to the lessor for the use of an asset in a lease transaction expressed

What are Lease Rates?

As we pay interest rates for financial instruments, we pay lease rates for commodities similarly. We define lease rate as the amount of interest a lender of a commodity requires. The lease rate is defined as the investor’s amount of return to buy and then lend a commodity. In other words, the lease rate represents the cost of borrowing the commodity. The lease and risk-free rates are important inputs to determine the commodity forward price.

Examples of Lease Rates:

The commodity forward price for time T with an active lease market is expressed as:
F0,T = S0 × [(1 + r) / (1 + δ)]T
where:
S0 = current spot price
r = risk-free rate
δ = lease rate
The lease rate, δ, is income earned only if the commodity is loaned out.
Let’s take an example of a commodity forward. If we have one year forward for corns with a spot price of $5 and a lease rate of 7%, with a risk-free rate of 9%. The forward price would be:
F0,T = 5 × [(1 + 0.09) / (1 + 07)]1= 5.093

Owais Siddiqui
1 min read
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