“The closer the future is to maturity, the greater the roll return is.” any thoughts on this?
Lemme try this. Its because as the futures comes closer to maturity, its price has to converge with the spot price, and thus increase in value (this is the case for backwardation). If the contract is farther away from maturity, the increase is at a slower rate as there is still time left to expire. So using the formula: Roll return = Change in futures - change in spot, there is much higher change in the price of futures if its closer to maturity, thus the higher return. Hope I was able to explain that correctly.
Why convenience yield increases leads to higher roller return?
Why convenience yield increases leads to higher roll return? BTW, is collateral return same as risk free rate?
The greater the convenience yield, the lower the futures price will be relative to the spot price. Because of the “convenience”, you’re willing to buy-and-hold it even though its price in the future will be lower. The lower the futures price is relative to spot, the greater the roll return will be because the price eventually has to converge to the spot price as the contract approaches maturity, like Sparty explained. BS
Thanks, BS. when close to maturity, how does spot price change in comparison with futures price change? how does convenience yield affect the spot price change?
Maturity and convenience yield affect future price change but not spot price change (correct me if I am wrong).
spot has no maturity and therefore no time-value costs (convenience, lease, storage costs)