One distinguishable feature of storable commodities is that they relate to two markets: cash market and storage market. This paper proves that, if no arbitrage exists in the storage-cash dual markets, the commodity convenience yield has to be non-negative. However, classical reduced-form models for futures term structures could allow serious arbitrages due to the high volatility of the convenience yield. To avoid negative convenience yield, this paper proposes a semi-affine arbitrage-free model, which prices futures analytically and fits futures term structures reasonably well. Importantly, our model prices commodity-related contingent claims (such as calendar spread options) quite differently with classical models.
Liu, P., & Tang, K. (2009). No-arbitrage conditions for storable commodities and the models of futures term structures [Electronic version]. Retrieved [insert date], from Cornell University, School of Hotel Administration site:http://scholarship.sha.cornell.edu/articles/1020