roll yield

can someone explain in simple laymans term what is roll yield. and why is it positive or negative in backwardation or contago. please give a simple easy to understand example of how this works. thank you

The reason, at least my understanding of it, is as follows. Backwardation = positive roll yied If you purchase a futures contract at say $30 when the spot is $40 it is backwardation. As you move forward in time your futures contract moves closer to the spot (in this case the spot is $10 more assuming spot doesnt change). If you were to sell out of this contract right before the futures contract was up and (assuming again spot is still $40) you would unload the position for $40 dollars collecting a $10 profit. Contango = negative roll yield If you purchase a futures contract at $40 when the spot is $30 it is contango. As you move forward in time and get closer to the spot (in this case still at $30) your price would have to come down because no one would buy the futures from you at $40 when they can get the spot of $30. Hence if the spot is at $30 when the futures contract expires you will incurr a loss of $10. I hope this helps.

if i understand correctly rolling is to enter to another contract so at what price would you enter in another contract? and how does collatrlized yield figure in all of this

one more thing schweser says in backwardation the future contracts are continiously rolled into ones that are relatively cheaper

Your first question is tied to your second post. The price of the contract that you would roll into depends on the price of the new futures contract when you roll your profits (backwardation) into that new contract. Think of it like an escalator where the bottom is the futures price and the top is the spot price (again in backwardation, opposite for contango). You buy futures at the ground floor as time elapses the price (steps) move closer to the spot (top floor) When the futures expires you repurchase at the futures price (new ground floor) the price will depend on the degree of backwardation or contango if it flips. Assuming the market stays in backwardation to perpituity you would always be rolling your expired future(now at the spot) to a cheaper (new futures contract), hence the schweser statement. As far as collateral yield, that is strictly your yield you get from holding cash in margin. Remember, with futures you do not pay everything up front, you put money in an account, as your position gains, the contra position has to put more money in if it falls below margin to stem risk of windfall at expiration. So the cash that you have there to cover shortfalls or gain from appreciation sits in there and earns the going rate (it is assumed 90 treasury).

thanks cfa kid i have not done futures yet so i didnt get the coletral yield but i got the rolling yield. i will re look after doing futures

you’re welcome. I don’t believe they mention it beyond the part in alt assets. The derivatives is pretty much just about pricing so as long as you remember it is the interest that the cash in the account earns you should be money.