Roll Return

Roll Return is the difference between the futures prices vs the spot prices.

Now if there is supply disruption, then convenience yield will increase.

What happens to the roll return then?



Here’s how I think about it.

Convenience yield is about how important (or convenient ) it is for the owner to actually hold the commodity. Given that the owner is putting a premium on actual ownership (ie, holding it), the future price is even lower than the spot price relative to what it would usually be, because the owner of a future (who doesn’t get to hold the asset) needs to be offered a lower price to compensate them for not having access to the commodity when it is really convenient to have access to it.

Now because the future price is lower, the roll return (difference between futures price change and spot price change over time) is even higher, as the lower futures price converges to spot.