Can somebody explain me the roll return, what is it and how to calculate it?
The short answer is: no, nobody can.
I’m not being a smart aleck here (y’all know that I would never do that); the fact is that CFA Institute is inconsistent in its definition and computation of roll yield, with one reading saying one thing and another saying something else.
I wrote an article on roll yield: http://www.financialexamhelp123.com/roll-yield-roll-return/
(Full disclosure: as of 4/25/16, there is a charge to read the articles on my website. You can get an idea of the quality of the articles by looking at the free samples here: http://www.financialexamhelp123.com/sample-articles/.)
Well, here is the detail I can’t grasp:
Why formula for roll return is: (near-term futures price - farther futures price) / near-term futures price
Isn’t it should be: (near-term futures price - farther-term futures price) / farther-term futures price
Should it be price appreciation or depreciation return?
There is no “should be” here. There are lots of ways that people define yield or return, and you simply have to know what they are.
(Remember bank discount yield – BDY – at Level I? You divide by the par value, not the price you paid. Would you ask, “Shouldn’t you divide by the price you paid?” Maybe you would, but the point is that the definition is dividing by the par value, not the initial price, and you need to know the definition, whether you think it’s stupid or not.)
I believe that the formula : (near-term futures price - farther futures price) / near-term futures price
is correct
This formula gives you the % increase or % decrease From the near term future prices.Because the change in price is being calculated from “Near term future price”, it’s correct to divide it with “Near Term Future Price”