The Schweser says,
“The collateral yield is not part of the change in futures price and is not included in the calculation for the roll return”
However, Curriculum book reading 31 Q4-A says collateral yield also has to be subtracted from the total retun to get roll yield.
My understanding is,
Roll return = change in FP - change in S
Total commodity futures return = spot return + collateral return + roll return
Then, change in FP is different from total commodity return? Hmm… still confused…
Can’t see any problem. Please re-read the Q4.A answer in the book.
BTW, the “implied yield” and “positive event risk” are ALREADY new to me…
My understanding is that in the question pointed by you, the data given is index return and not the change in futures price. The index return assumes fully collateralized position and hence includes collateral yield.
I am confused by this as well. Could someone please clarify this point further?
The index is not a futures contract , it is a regular market benchmark. So how will it have collateral yield embedded ? I have never seen any index with a cllateral yield .
The futures market with its margining requirement necessarily has to have collateral because that is how they mitigate risk to the exchange and yet pay the investor for their deposit.
Am I missing some point?
1, Roll return = change in futures price - change in the spot price 2, Collateral return is the return you earn when you post 100% margin(collaterals), which is usualy the risk free rate.
Yes, you can calculate the roll return from the following formula, but it doesn’t mean that Roll Return and Collaterial Return have no direct relationship. To earn the total commodity futures return, you hold futures coontracts and post 100% margin.
Total commodity futures return = spot return + collateral return + roll return
Ahhhh I think I get it. So the change in futures price is only due to the spot return + roll return, right? But your total return on the futures position is a combination of the change in futures price + the theoretical return you get from having your margin earning the risk-free rate. Is that right?
Both sound correct.
Thanks tulkuu!