notes v2 #morning exam 3 #4 it says when the futures contracts with longer maturities have lower futures prices ,the mkt is said to be in the backwardation… but the roll yields caculated above for the longer maturities are also lower than for the shorter ones, then doesn’t that mean a contango when roll yields are going down???
exhh that would depend if curve is convex or concave, i was under impression it is convex
Hmm… interesting. I had never run into a situation where roll yields are mentioned as either increasing/decreasing. I just know that during backwardation, roll yields are positive. Anyone remember the formula for total return? ie: Roll Yield, Collateral Yield etc… and what impacts each? Should do for a good review…
- roll yield from backwardation 2) colleteral yield 3) spot yield
Okay… now explain Collateral Yield and Spot Yield… 
Collateral Yield is the extra return from holding the asset for those that benefit from holding teh asset such as Bread producers storing grain Spot Yield - is the return on the spot rate Right?
bigwilly Wrote: ------------------------------------------------------- > Collateral Yield is the extra return from holding > the asset for those that benefit from holding teh > asset such as Bread producers storing grain > > Spot Yield - is the return on the spot rate > > Right? right
soexcel Wrote: ------------------------------------------------------- > notes v2 #morning exam 3 #4 > > it says when the futures contracts with longer > maturities have lower futures prices ,the mkt is > said to be in the backwardation… > > but the roll yields caculated above for the longer > maturities are also lower than for the shorter > ones, then doesn’t that mean a contango when roll > yields are going down??? I’ve never heard of something like convexity for backwardation. Must have some usefulness in life.
Hmm… i thought “Convenience Yield” was what you would get if you would benefit from an asset you would normally hold. I thought Collateral Yield was just the Risk Free rate or am I mistaken here?
PJ, exactly, that is why i said a Bread producer storing Wheat, they benefit from holdign the asset…if they ran out of wheat they would be in trouble… And no its not just the Rf rate
coll yield is the interest you gain by having some assets held for collateral… if you are buying futures you need to deposit some collateral…
so then how does Collateral Yield differ from Convenience Yield then? They sound the same based on the explanation above.
AH! PJ I was thinking of Convenience Yield! Good ol’ Chap. You’re right . Collateral Yield is what 3rd and long says i guess
okay… I was getting worried there for a second hehe…