Closer future contract to maturity, greater roll return...



Where do you see it?

Found some notes in my notes :expressionless:

Tell me if you find it somewhere else. Would surprise me. Don’t think it’s correct. But I may be wrong.

That’s the reason why I am asking. I don’t know anymore :expressionless:

I found it in the CFAI text. But I am not sure if it is only in the case of backwardation or contago, too. See Exhibit 16 - Calculation of roll return

page #?

Sorry, p. 49-50

I think they mean rolling from June to January has a greater roll yield than rolling from June to August.

Just futher solidified that the shape of the term structure is downward sloping

Hm. Not sure :expressionless:

I guess it depends on the forward curve. Was probably valid for that example but cannot be generalized.

This doesn’t make sense. if you picture the forward curve, as it gets closer to maturity, the forward price is closer to the spot price, thus lower roll yield.

Further out on the forward curve in (perfectly normal) backwardation the larger your % roll return, implied by the difference in prices over the term structure.

Term Structure:


M2 .99

M3 .98

M4 .97

M1 to M2 100-.99 / 100 = 1%

M1 to M4 100-.97/100 = 3%

3% > 1%

Its the difference betwenn the forward contracts minus difference between the spot. So, its too simple to say it like that?!


Gave this some more thought after reading that section of the text.

All they’re trying to say is the absolute $ convergence towards the spot rate is greater for the contracts closer to maturity than those which are further away. The backwardation in the forward curve decreases at a decreasing rate the further out you go. m1 will converge more than m2 and m2 more than m3 ect

I love the mini curve balls they have spirnkled through the 3k pages of material -_-

That sound kinda correct. :slight_smile:

I think it has to do with less change in spot. As your approach maturity, the spot should change less, thus as the forward converges to spot, the spot price should remain rather static. Mathmatically i look at it like this (from a relative perspective)

Roll yield = change in future - change in spot

The % change in the future will be > the % chanage in spot (relative to the other time horizons) thus producing a higher roll return

I could very well be wrong but thats how i infer it

Sounds intuitive…

So, that should be hold in contago and backwardated markets, shouldn’t it?