i dont understand how roll yield is created by rolling a short term future contract into a longer one during backwardation? can someone give me an example? read the book and notes and the video series, dont really help.
forward price is less than spot price, since there are many hedges on commodity like oil. " Backwardation occurs when a futures contract will trade at a higher price as it approaches expiration compared to when the contract is farther away from expiration. Rolling into less expensive futures contracts allows the trader to consistently profit from the rise in a futures’ price as it nears expiration. " http://www.investopedia.com/terms/r/roll-yield.asp so the longer term contracts are priced lower, and “rolling” or buying the shorter term ones with the sale of the longer ones will let you take advantage of the price difference.
this doesnt sound right, buying shorter-term contract (more expensive) and selling longer term contract (less expensive) at the same time ?
you have a short term contract (sell), and you buy a longer term contract (cheaper). you keep doing this over and over. that is how i understand the topic to work. i mis-spoke above
hi there, the assumption is that spot prices remain stable! this is key here… contango if: F(0,T)>Spot(0) whereas F(0,T) denotes a future entered into in t=0 (today) with maturity in t=T now you know, that because of the law of no arbitrage F(T,T)=!Spot(T) (per assumption of stable spot prices =Spot(0)) i.e. if future prices at t=0 were > S(0), to satisfy the law of no arbitrage, future prices must have fallen in the interim period until maturity. the result is F(0,T) > F(T,T) negative roll yield. backwardation, vice versa.