# Commodity Index Return Components

[New thread started] Has anyone figured out why the addition of Spot Return appears to be deleted from Total Return calculation of answer to: CFAI question #31 (p.125, vol 5)? If: Total Return = Roll Rtn + Collateral Rtn + Spot Rtn And: Roll return/Yield = End futures price - Begin futures price - Change in spot price And: End futures price = 40.76 Begin futures price = 39.07 Change in spot price = 0.90 Collateral Rtn = 0.15 Then: Wouldn’t Total Return = [(40.76 - 39.07) - 0.90] + 0.15 + 0.90 = 1.84? The book leaves out the last 0.90 and says answer is: [(40.76 - 39.07) - 0.90] + 0.15 = 0.94. ************************************** Posted by: JoeyDVivre Date: December 16, 2008 11:14AM …the collateralized futures return is broken down into those three components. If you own the futures contract and know what the return is on the futures contract, you don’t care what the spot does. For instance, if I buy an Dec 2009 corn contract at 380 and it goes to 385 my return on the futures contract has nothing to do with spot corn (note that Dec 2009 corn hasn’t even been planted yet). My return on a collateralized contract includes whatever interest I earn on the margin account balance. ************************************** Posted by: lolly Date: December 16, 2008 12:06PM Follow up question: Thanks Joey, but I guess I’m just confused b/c the text only teaches us to apply the 3-component formula to arrive at total return, and not the exceptions to the rule. How do we know if we ‘own’ the futures contract (and to not add the spot rate)? The question only says to assume that you have a “fully collateralized futures position.” Is this the same as ‘owning’ the contract?

yea… I have the same question too … Anyone knows why? Roll Return = 40.76 - 39.07 - (change in Spot) = 40.76-39.07 - 0.9 = 0.79 Collateral Return = 0.15 Spot Return = 0.9 So Total Return = 0.79 + 0.15 + 0.9 = 1.84 ??

I haven’t seen this yet…but how r u assuming spot return = change in spot price?? aren’t they two different things??

I also confused on this question. hope sb can explain it.

it just assumes that the change in futures consists of both roll return and change in spot. so if you are long @40 and in moves to 50. you are up 10. however this 10 is not all from the futures return. it is in part due to the change in spot. so say spot moves by 2. then your roll reutn is 8 and sport return is 2.

Hi guys – This is in the CFAI errata. The correct answer is 1.84. Their bad.