Since spot price = future price at maturity, where is the roll yield from?
IIRC it’s to do with backwardation of the curve
Roll yield results from rolling a long futures position forward through time. When a market is in backwardation (futures price is lower than the spot price), a positive return will be earned from a simple buy and hold strategy, This is b/c as the futures contract gets closer to maturity, the price must converge (contract price will go up) to that of the spot price of the commodity. When you roll it forward to the next month, you are buying a new contract at a price that is lower than the spot price. Roll Yield = Futures Price at Month (t) – Futures Price at Montht-1 – Change in spot price The opposite is true when there is an upward sloping term structure of futures prices (i.e. the market is in contango and the futures price is higher than the spot price). Hope this helps.
Hey Daggny, I didn’t understand why the change in sport price iks subtracted within the formula, can you give me more details or an example plz? Thanks a lot! M.
Any thoughts? Thanks! M.
See the post titled “commodity ror” on the level III board right now. Null&nuller has a good explanation. I would paste the link but I am using my phone right now.
jogging, We know that the future’s price will always equal the spot price, always, otherwise somebody can abritage. Assume that the spot price stays constant and always stays constant. In a backwardation curve you can buy the future’s contract at a lower price of the spot and we will know that it will move towards the spot price as time goes by. You will earn the positive basis (spot price - futures price). This is due to cost of carrying the commodity. This is also a reason why commodity futures can be consider an asset class.