# Question - Roll return and backwardation and contagion

Source: Schweser SS13 The term structure of futures prices Backwardation produces a downward sloping term structure of futures prices (i.e term structure is negative) and such a condition predicts a positive roll return as the futures price increase to the spot price. A bit confused on this. Can someone help to explain the above? How the negative term structure of futures price will predicts a positive roll return?

negative sloping term structure implies that current spot rate is above the futures price for a contract say 1 month out. As the expiration on the one month contract approaches, the futures price converges to the spot price (no arbitrage condition), so the futures price will increase.

Let say current month is march. lets say spot is \$30 April futures is \$28, and May futures is 26. Lets say you have entered into April contract. So in april spot will converge to \$28. So you will sell the numbers of contract at \$28 and buy may for 26. ( positive roll return of \$2) I hope this helps

amit_cfa2 Wrote: ------------------------------------------------------- > Let say current month is march. lets say spot is > \$30 > April futures is \$28, and May futures is 26. > Lets say you have entered into April contract. So > in april spot will converge to \$28. So you will > sell the numbers of contract at \$28 and buy may > for 26. ( positive roll return of \$2) > > I hope this helps The formula for roll yield is change in futures px - change in spot px. Applying the formula, I got -2 - (-2) = 0. Mainly a positive roll return means change in futures price > change in spot price, since the futures price will converge to the spot price. Is my understanding here correct?