Hey all, just working through book 7 and in exam 3 AM I came across something I don’t follow: You’re given the folowing info and asked to calculate the roll return Contract maturity July Futures Price June 15th 63.25 Futures Price May 15th 62.55 Change in Spot price .5 I would have thought that the roll return (being the change in the futures price not attributable to change in the spot price) would be: 62.55 - 63.25 - .5 = - 1.2 Meaning that as the maturity date grows closer the futures price falls to the spot price resulting in a negative roll yield. In the answer Schweser gives the roll yield as: 63.25 - 62.55 - .5 = .2 Can anyone explain where I’m going wrong with this?
your roll return is: June - May - Spot.
I think: if there was no roll yield then you would expect the price to increase by the change in spot price. Hence price in June would be 62.55 + 0.5, but because there is a roll yield it actually increases more. So you take the difference between these amounts.
but why? to get a positive roll yield you need the market to be in backwardation right? which means futures prices are lower than spot prices? (no books in front of me so I might be totally off). So, as the futures maturity draws closer the futures price rises to the spot price so thus the May futures price should be higher than the June futures price and a positive roll yield would be May - June - Spot? getting myself royally confused now…
Roll yield will be postive if the market is in backwardation (f
The backwardation means that a futures contract six months from maturity has a lower price than a futures contract three months from maturity. I presume in the example you quote the maturity is the same for both dates, but the time to maturity is less in June, hence price is higher.
AnalyseThis Wrote: ------------------------------------------------------- > Roll yield will be postive if the market is in > backwardation (f than May futures but you don’t know what the spot > is - they only gave you the CHANGE in spot, not > the spot. So you don’t get a clue from there. > > Just use the formula : Roll yield = Change in > futures - change in spot Total return =Roll yield + spot return + collateral return =(change in futures - change in spot) + change in spot + collateral return =change in futures + collateral return Collateral return = risk free return Am I correct?
> Total return > =Roll yield + spot return + collateral return > =(change in futures - change in spot) + change in > spot + collateral return I would stop here but technically you should be correct. > =change in futures + collateral return > > Collateral return = risk free return > > Am I correct? Correct because collateral used is generally T-Bills.