{"id":23909,"date":"2021-11-29T08:31:52","date_gmt":"2021-11-29T08:31:52","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=23909"},"modified":"2024-04-11T11:37:49","modified_gmt":"2024-04-11T11:37:49","slug":"roll-returns-in-markets-in-contango-and-backwardation","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/roll-returns-in-markets-in-contango-and-backwardation\/","title":{"rendered":"Roll Returns in Markets in Contango and Backwardation"},"content":{"rendered":"<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/udiQ7r5Y7H8\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\r\n<p>Roll return is the amount of return generated in the futures market after an investor rolls a short-term contract into a longer-term contract and profits from merging the futures price toward a higher spot or cash price.<\/p>\r\n<p>When a market is in backwardation, the future price of an asset is below the expected cash or spot price. In this case, an investor profits when the position is rolled to a contract with a later expiration date. The investor effectively pays less money than expected by the spot market for the underlying asset that the futures investment represents.<\/p>\r\n<p>Negative roll return occurs when a market is in contango, which is the opposite of backwardation. When a market is in contango, an asset&#8217;s future price is above the expected future spot price, so the investor will lose money when rolling contracts.<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Which of the following is <em>most likely<\/em> accurate about a commodity futures market with pricing in backwardation?<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>The roll return is usually negative.<\/li>\r\n\t<li>Rolling an expiring futures contract forward will require buying more contracts to maintain the same dollar position in the futures markets.<\/li>\r\n\t<li>Rolling an expiring futures contract forward will require buying fewer contracts to maintain the same dollar position in the futures markets.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is B.<\/strong><\/p>\r\n<p>Commodity futures markets in backwardation exhibit price curves in which longer-dated futures prices are lower than near-dated contracts, and the nearest dated contract is priced less than the current spot price. With a lower futures price on the futures curve, rolling contracts forward in backwardation would require purchasing more contracts to maintain the same dollar position.<\/p>\r\n<p><strong>A is incorrect.<\/strong>\u00a0The roll return is usually positive, not negative, in markets in backwardation.<\/p>\r\n<p><strong>C is incorrect.<\/strong>\u00a0An investor would need to purchase more, not fewer, contracts in markets in backwardation to maintain his or her total dollar position.<\/p>\r\n<\/blockquote>\r\n<p>Reading 35: Introduction to Commodities and Commodity Derivatives<\/p>\r\n<p><em>LOS 35 (h) Contrast roll return in markets in contango and markets in backwardation<\/em><em>.<\/em><\/p>\r\n<ol><\/ol><!-- \/wp:post-content -->","protected":false},"excerpt":{"rendered":"<p>Roll return is the amount of return generated in the futures market after an investor rolls a short-term contract into a longer-term contract and profits from merging the futures price toward a higher spot or cash price. When a market&#8230;<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[562,102],"tags":[],"class_list":["post-23909","post","type-post","status-publish","format-standard","hentry","category-alternative-investments","category-cfa-level-2","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Roll Returns in Markets in Contango and Backwardation - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"description\" content=\"Learn why rolling an expiring futures contract forward in a market in backwardation requires buying more contracts to maintain the same dollar position, contrary to markets in contango where roll return is negative.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/roll-returns-in-markets-in-contango-and-backwardation\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Roll Returns in Markets in Contango and Backwardation - 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