6 month forward rate is higher than the spot rate. so the forward rate will “roll down” to the spot. This will mean that when you settle the forward in 6 months - you would pay a lower price to settle the spot and then buy the forward at the higher price. So you will have a loss - a negative roll yield.
For the first case - roll yield = 1499.23 / 1483.89 -1 = 1.03% (-ve)
i should clarify that whether it is a positive or a negative roll yield also depends on whether you are long the initial contract or short the contract.
if you are long the contract - you get into a forward contract - will sell at the spot at the forward date, and then buy a new forward contract. You sell low, buy high - get into a negative roll yield.
If you are short the contract - you will buy low spot, sell high forward - and this will be a positive roll yield.
CPK thanks for taking the time to explain this concept. The calculations give a positive value yet your response indicate the roll yield is negative. can you further explain this aspect. Additionally this is a case where the investment is long the base currency so my understanding is that the hedge will involve shorting that currency.Is this correct and howw does this impact the answer? I also dont understand what takes takes place when the hedge matures and how this affects the roll yield.
Would the higher forward rate always roll down to the lower spot rate meaning that the roll yield in this instance is always positive?
I still dont get roll yield after reading this. In a long futures contract you are going to lock in a futures price, and current spot price is lower than futures price (contango) but isnt your profit depend on what the spot price is at expiration? so lets say at expiration of the futures contract the spot price is above the locked in futures price you make a profit?
If you are long on MXN, and MXN is trading at premium, then this is + roll yield because in order for you to hedge, you should sell (opposite of long) MXN and since MXN appreciated, then you are selling at higher thus (sell high buy low) = + roll yield. I hope it makes sense now…
ok that actually painted a much better picture for me, ok so roll yeild only applies if you hold the underlying, in the case you presented I am a US investor with a MXN foreign asset and i am hedging MXN by shorting MXN futures and if MXN is in contango I have positive roll yeild, that makes sense in that aspect. (let me know if im wrong)
But if I dont hold the underlying(have no MXN assets) and I am taking a speculative position in a short futures on MXN contract will there still be a roll yeild?
in both cases above, the euro is trading at a forward premium. Since you have entered a forward contract to buy euros that are at a premium in the forward market compared to the spot market, you would experience negative roll yield, since you are in a contract to purchase a currency that is cheaper to purchase in the spot market
I have entered a contract to buy an asset that is cheaper if I did not enter the contract and bought it spot ,that’s negative. If i was short the forward contract and the currency in was short was trading at a premium that would be positive roll yield since I am selling high
does roll yield only apply to currency? or can it be equity futures as well? the only way a contract would have a positive roll yield in backwardation would be if i was short the underlying (lets say S&p500), and hedging by going long futures on S&P500 ?
I am holding european assets and I am a mexican investor, I need to convert my euro assets back to mxn so i need to enter a SHORT forward contract to sell euros and buy MXN.
If the euro appreciates that is the euro now buys more MXN in the spot market than the forward market then I would receive more MXN through the forward contract than if I was unhedged and was buying MXN in the spot market.
This i have benefited from hedging and this lead to a positive roll yield.
yea now i am confused as well maybe instead of selling euros, you are buying MXN forward and selling EUR forward (its the same transaction) you are exchanging currencies, if MXN forward is > spot, MXN is in contango there for were are paying a higher price in fwd market so negative roll yield from a MXN investor.
Now the other way around, im a EUR investor with MXN assets and need to sell MXN forward and buy EUR forward (opposite of the above) but the difference now is that if that I am on the otherside of the transaction therefore futures EUR is in backwardation (F
I was reviewing this today with a friend and I think it simplifies to 3 things. First figure out what your hedge position is based on your current position. Then figure out if you are long/selling or short/buying. Then figure out if the forward is selling at a discount or premium. If premium, then you are selling for more/positive or buying for more/negatvie. If discount, you are buying for discount/positive, or selling for discount/negative.