I have been struggling for a while in grasping the concept of futures return (roll return) and backwardation. It is said that the roll return is positive when the futures market is in backwardation. Did they mean mean backwardation (F < S0) or normal backwardation (F < Es) ?
Why do they assume that spot doesn’t change?
Can someone provide a good clarifying example using numbers?
F= $90 gold
S= $100 gold
We went long the futures contract on gold for $90
In this case we have backwardation (F < S0) therefore as the contract approaches maturity, futures price need to converge with spot and therefore it is going to increase so that it reaches $100 one second before maturity of the contract. My question is, when are we going to roll the contract into a cheaper one? I can only see the futures price going up.
What makes you think that at maturity the spot price will still be $100?
I dunno, thats the assumption they use the whole time. That the Spot doesnt change and Future price converges to that price