Jill Beaman, CFA, notices that for wheat futures there is a downward-sloping term structure of futures prices. Beaman should recognize that this would be associated with: A) normal backwardation and a positive roll return. B) normal backwardation and a negative roll return. C) contango and a positive roll return. D) contango and a negative roll return. Answer is A - Normal backwardation, when it exists, produces a downward-sloping term structure of futures prices. Such a condition predicts a positive roll return. If the term structure is positive, which is a result of contango, the roll return would be negative. I don’t quite understand the concept of positive roll return. Normal backwardation reflects positive roll return and Contango reflects negative roll return. Please help explain.

Normal backwardation means futures are lower than expected spot prices. This matches with a downward sloping term structure. When you roll from a current contract to the next contract, you would be transacting at the expected spot price (which is higher than the futures price that you bought it at) and so the roll return is positive. hope that’s correct!

Can someone please confirm if this is correct? So you are saying that the current contract is a future and you roll into a new/next contract which is at expected spot rate which offers a higher rate? When you roll from a current contract to the next contract, you would be transacting at the expected spot price (which is higher than the futures price that you bought it at) and so the roll return is positive.