Total return of futures (roll yield)

CFA Level II Alternative Investments
#1

I’m having trouble understanding the roll yield aspect of futures total return. I understand the concept of capturing a positive return by buying a forward in backwardation (as in, if you hold the contract until expiration and the spot price stays the same you will capture the basis return). However, I’m having trouble putting this together with the price return and collateral return to intuitively understand total return.

For example, assume a commodity spot price stays the same over a year ($105), and I continually buy and roll 3 month forward contracts that are priced at $100. My understanding is that my quarterly price return will be 5% (as my forward I bought at $100 is closed out at ~$105), but I will also have a 5% roll return (as I’m rolling my position into forwards priced at a discount to the spot price). Is this correct? Ignoring collateral yield, will my total return be 10% per quarter? I feel like I’m only getting a 5% quarterly return by buying and rolling these contracts.

Thanks for the help!

#2

In your example spot retrun = 0% - spot price has stayed same

Roll return = 5%
Roll return = change in futures - chnage is spot
5% = 5% - 0%

If say spot had moved to 105
spot return = 5%
roll return = 0%

if say spot had moved to 110.25

spot return = 110.25/105 -1 = 5%
ch.fwd price = 110.25/100 -1 = 10.25%

roll return = 10.25% - 5% = 5.25%

#3

Thank you! What I was confused about is the “price return” is actually the spot return. In practice questions, this price return was usually the difference in price between two near-term futures prices, but now I am recognizing that these are used as a proxy for the spot return.