roll yield

came across this on the note:

“consider an investor who sells CHF 1 million six-month forward for USD 1.05 when the spot rate is 1.04. The forward price is at a premium so the roll yield on a short position will be positve”

can someone explain why the roll yield on the short position has positive value??

my understanding is that if you sell a currency forward you essentially long the currency, you gain when its value drops you lose (negative value) if its value rises. in the above case, CHF is trading at forward premium (currency value rises), is the roll yield on the short position not supposed to be negative???

similar to the above question, why the roll yield is positive in a backwardation (FS)?? can someone explain whats involved when you buy, for example, an oil futures contract?? oil futures contract is usually in contango because people expect scarcity of oil in the future and thats why people buy oil futures contract to early lock in a cheaper price. my understanding is that when future spot price is higher than what you early lock in price you future contract should have positive roll return, does it not??

these two questions have bothered me for so long, someone please kindly explain. many thanks!!

can you someone help pleaz…thank you in advance!

Shorting in a market that exhibits contango earns positive roll yield since no arbitrage dictates that forward prices will converge to spot prices. Convergence is the key term here.

Also, roll is related to carry. If USD/CHF spot is 1.04 and forward 1.05, then short the lower interest rate CHF and long the higher interest rate USD.

You’re right that the forward rate implies CHF to appreciate but if you read further about carry strategies you’ll find that UIRP (forwards being unbiased predictors of future spot) typically does not hold in the short term.

Isn’t the market in contango since the forward price is higher than the spot ?

Since you are shorting the forward and that the forward curve is in contango, you are making money as the forward rate (1.05) roll down to the spot rate (1.04).

My 2 cents

You’re absolutely right, I’ve edited my previous post: shorting in contango yields positive roll. I got confused by the question since there were some contradicting statements in it.

what was the contradicting content?

i thought that regardless in contango or backwardation, forward price will converge to spot, so if forward is lower than spot, then return should be positive, should not it?

You questioned whether CHF trading at forward premium should be negative roll when shorting, while it’s actually positive. Think about it this way: there are 2 return components to the position. One is roll yield dictated by convergence of forward to spot which is known. Second is spot price change which is unknown.

If F