Found this link: http://www.analystforum.com/phorums/read.php?12,1145232,1145980#msg-1145980 but what is the answer?? Q ------------- Yusuf decides he will seek investments in those commodities that are most likely to produce positive roll yield. THe commodities in which Yusuf invests are most likely to have: Few limitations to storage prices that are volatile and at historic lows prices that are voatile and at historic highs. So he wants positive roll yield and so contracts that are in Backwardation where Future Price < Spot. But none of this helps me with this question??? The answers are even less use: “B is correct because positive “roll yield” occurs when the futures price is above the “full carry” price, referred to as backwardation, which may occur when prices are low and volatile and producers are concerned that they will fall further, to a level that is unprofitable. Producers will accept less that the “full carry” price in order to hedge price risk.”
Think why backwardation occurs, if spot prices are falling, some people may sacrifice large losses and lock in a future contract that has F < S. When prices are falling the volatility exacerbates the problem, thats why.
Northeastern Student Wrote: ------------------------------------------------------- > Think why backwardation occurs, I didn’t actually know… Thanks anyway clears it up.
Just came across this: Roll yields are only positive when prices are in backwardation. In a contango, expiring futures contracts must be replaced with higher-priced contracts, resulting in a negative roll yield. to answer your question if prices are at their lows, then they are most likely trading in backwardation
its in the CFAI texts explains how/why both conditions occur