Why does rolling long futures positions forward capture positive return when the term structure of futures price is downward sloping? I thought it would be upward sloping.
search the forum for at least the last 90 days, maybe more - i covered this off a while back. but think of it this way. futures prices farther in the future cost less when in backwardation. that is a may future is worth less than a june future. so if you buy a may future and hold it to june, you rolled forward tto june and captured a roll return that is positive.
Thanks striker found your post most appreciated.
You roll over 30 day contracts. S > F, so you end up buying future contracts that increase in price as the basis converges. Reasons why F < S are Lease rates high or higher convience yields, so you keep earning positive roll as the future converges to the higher S price.
strikershank Wrote: ------------------------------------------------------- > search the forum for at least the last 90 days, > maybe more - i covered this off a while back. > > but think of it this way. > > futures prices farther in the future cost less > when in backwardation. that is a may future is > worth less than a june future. > > so if you buy a may future and hold it to june, > you rolled forward tto june and captured a roll > return that is positive. But most of the time commodities are in contango (F>S), so the roll return is negative in this case?
yes correct contango has negative roll return
Backwardation happens when there are benefits to actually possessing the underlying between now and when the future expires. These benefits are discounted from the futures price. If they outweigh the RFR and any storage costs, then you get backwardation, and then you get roll yield. For underlyings like stock and bonds, these benefits would be interest payments or dividends. For commodities, it’s usually just convenience yield (the risk reducing benefit to a business of actually having stuff on hand when they need it) that causes backwardation and enables roll yield.
Great answer chadwick, clear and concise, Thanks!