schweser book 4, page 29, if backwardation exists, successive futures price is lower, predicates a positive roll return, as the future prices increases to the spot price. how come future price is lower and increase to the spot price at the same time? how does it generates positive roll return? CFAI book 5, page 52, and how to calculate roll return? roll return=change in future contract price-change in spot price over the month, but i googled and roll return=spot price-future contract price, which one is correct?
futures price can be lower in a farmer dominated market. suppose a farmer wishes to lock in a price for his produce that will be ready for harvest in 3 months … he’s willing to accept a lower futures price to guarantee selling off all his produce. if F
level3aspirant Wrote: ------------------------------------------------------- > futures price can be lower in a farmer dominated > market. suppose a farmer wishes to lock in a price > for his produce that will be ready for harvest in > 3 months … he’s willing to accept a lower > futures price to guarantee selling off all his > produce. > if F hence will increase in value to register a > positive roll yield. > for purposes of level 3 (atleast) use roll yield = > #futires price - # spot price based on your explanation, I developped an example. Jan/01---- corn spot price $11—2 months future $10— 3 months future $9 farmer wishes to lock in a price for coming harvest even it’s lower than spot price, and the longer term future, the lower price, i.e. future backwardation. Apr/01---- corn spot price $12 all future price converge to spot. change in future contract price:12-9=3 change in spot price 12-11=1 roll return=3-1=$2 positive roll return ----------------------contango example---------------- Jan/01---- gold spot price $9—2 months future $10— 3 months future $12 the longer term future, the higher price, i.e. future contango . Apr/01---- gold spot price $8 all future price converge to spot. change in future contract price:8-12=-4 change in spot price 8-9=-1 roll return=-4-(-1)=-3 negative roll return OK,I feel better now.
To confirm when calculating Roll Yield, you only consider the forward price of a contract at the outset and the subsequent change in spot price? i.e. the change in forward contract price is always the price at the outset less the spot price at maturity which is equal to price of a forward contract expiring on the same day? is my understanding correct?
roll return = dollar change FP - dollar change spot price see: textbook, Vol 5, P.52