Their explanation makes no sense to me…they say: positive “roll yield” occurs when the futures price is above the “full carry” price, referred to as backwardation. If futures prices are above the carry prices then aren’t you buying overpriced futures? Sounds like negative roll yield to me… Anyway, I understand how B could be the answer here, based on producers worried about prices dropping further…however, I would think that A could also be the answer. If you didn’t have low storage costs then your futures curve would be in contango and your roll yield would be negative. What am I missing?
Haven’t seen an errata on this yet nor a decent explanation. I would ignore this one for now.
only futures trading at backwardation (price below spot price) receive the roll yield
If the market is in contango, then there is a negative roll yield.
Here’s my take: A) few limitations to storage–> this may or may not be true. if something has few storage limitations, this just means that there’s no FV(NC). but to get a FP that is actually less than S you need a high convenience yield. C) prices that are volatile and at historic highs --> if prices are high, producers are living the good life. there’s no need to hedge. if prices go up even more, that’s great. if they fall a little, no big deal, because prices are at historical highs anyway B) prices that are volatile and at historic lows --> you’re a producer and prices have been falling and falling. youre scared shitless of them falling even more so you hedge your product (i.e. wheat). to entice speculators to take on your risk, you have to give them a lower price, otherwise they wont take it. So F < S. This is why B is correct. With that said, only the last sentence of their answer makes sense to me. The beginning is either wrong or above my head, but I don’t see how it is a true statement that “positive roll yield occurs when the futures price is above the full carry price.”
The first and last sentence of are contradictory. The last sentence is the correct one and I believe that it’s an error. I think the first sentence should be: “Positive roll yield occurs when the futures prices are BELOW the full carry price, referred t o as backwardation” This would be compatible with the last sentence: “Producers will accept LESS than the full carry price in order to hedge” That’s how I know it and how I will remember it.
Glad I saw this cuz their explanation drove me nuts. Think they did that on purpose so they can screw people over? Plus no errata. Totally unfair. Thanks for bringing this up, Ceredwyn.