Commodity - Collateral and Roll Return

CFA Level III
#1

Hi all, Another question for the experts! 1) on P. 52 of Book 5 of CFA readings, collateral return assums that an investor long a futures contract posts 100% margin in the form of T-Bills (in such a case the futures position is said to be fully collateralized). What does it mean by posting a 100% margin in the form of T-Bills? 2) Roll Return arises from rolling long futures positions forward through time. If it is backwardataion, it is best to buy and hold because future will increase in value close to maturity date. If there is convenience yield, this effect is more prominant as earlier future rate is depressed even further due to the nonmonetary benefit from owning the spot commodity. Is my understanding correct? 3) P. 56 Example in Book 5 of CFA reading - solution 3, does anyone know why it says that “production may occur only if futures prices are below the current spot price, which is associated with a downward-sloping term structure of future prices”? Many thanks again!

#2
  1. Assume that you buy a future for $100 - you don’t actually pay $100 now, so you can invest the $100 in t-bills for the maturity of the futures. At the end of the period, when the payment for the future is due, you have $100*(1+r). The $100 goes to pay for the future, the rest is your collateral return. 2) Roll return is generated when you buy a future for, say, 1 month and then roll it over into the next (cheaper in case of backwardation) contract. Convenience yield is the benefit of holding the underlying and needs to be subtracted in the calculation of the futures price, so a higher convenience yield will intensify backwardation. 3) Don’t know…don’t the book here.
#3

> 3) P. 56 Example in Book 5 of CFA reading - > solution 3, does anyone know why it says that > “production may occur only if futures prices are > below the current spot price, which is associated > with a downward-sloping term structure of future > prices”? > > Many thanks again! Encourages to start production (for example, say oil), if the prices right now are high enough to outweigh the costs.

#4

Thank you Kingstongal and Idreesz!

#5

#3 is called a real option and they will only produce if in backwardation (when they can make a profit)

#6

Collateral Return + (Forward - Spot Return) + Spot Return

#7

Forward - Spot return = Roll Return correct?

#8

Soccertom9 Wrote: ------------------------------------------------------- > Forward - Spot return = Roll Return correct? yes sir.