Roll Return

Tried few time…some help please. Can somebody explain to me in English what is Roll Return, and why you can only realized positive roll return given a downward-sloping future price term (backwardation), and why the roll return incrase as the contract approach maturity. Thanks

Roll return = return that arises from rolling long futures positions forward through time. i.e. -> Roll Return = May price minuse June Price. Lets assume a July settlement for a futures position. In a basic sense, F = Se^rt So we know that in may the F value is greater than the June value (all else equal but the passage of time). So in a downward sloping curve, the june price will be lower than the may price. Thus creating a positive roll return. Remeber -> roll retrun = Total return - spot return - collateral(yield) return

strikershank Wrote: ------------------------------------------------------- > i.e. -> Roll Return = May price minuse June > Price. > THAT is how you look at…now I am cool. Thx! What about the fact that as contract approach maturity, roll return increase? Thanks!

roll return increases because you take a position say in may for a july maturity. as per the equations above, the may futures price should be the largest, the july futures price should be the smallest as the basis risk (the difference between spot and futures) narrows… So, making numbers up here’s an example… Roll return - > May - June 13th = 1.1 Roll return - > May - June 28th = 1.7 and so forth…that help or should i try to eplain anothe rway. I can do an example with real numbers if you’d like.

strikershank Wrote: ------------------------------------------------------- > > Roll return - > May - June 13th = 1.1 > Roll return - > May - June 28th = 1.7 > I see it now…given the backwardation!! thanks striker! It really helps with some fresh set of eyes. Maybe I need my wife to do some reading for me sometimes.

When your wife’s done reading, you can make it up to me by sending her over here to do some cleaning. I’m not lucky enough to have someone to run errands for me while i study! haha.

strikershank Wrote: ------------------------------------------------------- > you can make it up > to me by sending her over here to do some > cleaning. LOL!!! You know…that is not a bad idea during CFA study season…that will actually give me more time to study, and less guilt. CFA season ==>bad. Relative newly wed during CFA season==> double bad!!!

I’ve got the cleaning and reading handled but maybe you should send your wife up here anyway.

I am not French.

ws Wrote: ------------------------------------------------------- > strikershank Wrote: > -------------------------------------------------- > ----- > > you can make it up > > to me by sending her over here to do some > > cleaning. > > LOL!!! You know…that is not a bad idea during > CFA study season…that will actually give me > more time to study, and less guilt. > > CFA season ==>bad. > Relative newly wed during CFA season==> double > bad!!! wifey organizing the wedding and letting me study for L2 => SUPER GOOD

Roll returns occur when there is a backwardation (there is a significant convenience yield), so future prices are decreasing as they further out. As you move on the curve, future price will increase so when you roll your future to future further out on a curve you will earn a “roll yield”

Doesn’t the wifey (and her parents) generally take care of the wedding anyway? You just nod your head and agree!

comp_sci_kid Wrote: ------------------------------------------------------- > wifey organizing the wedding and letting me study > for L2 => SUPER GOOD Care to write a SWAP contract with my wife??

Depending on a number of key factors, there may need to be some points upfront for that trade… =)

futures converge to spot at maturity … so in backwardation when futures are less that the spot the convergance leads to positive roll return… Near maturity contracts will have higher roll return …