{"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":"2026-06-02T19:15:11","modified_gmt":"2026-06-02T19:15:11","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":"<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"What is most likely true about a commodity futures market in backwardation?\",\r\n    \"text\": \"Which of the following is most likely accurate about a commodity futures market with pricing in backwardation? A. The roll return is usually negative. B. Rolling an expiring futures contract forward will require buying more contracts to maintain the same dollar position in the futures markets. C. Rolling an expiring futures contract forward will require buying fewer contracts to maintain the same dollar position in the futures markets.\",\r\n    \"answerCount\": 3,\r\n    \"suggestedAnswer\": [\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"A. The roll return is usually negative.\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"B. Rolling an expiring futures contract forward will require buying more contracts to maintain the same dollar position in the futures markets.\"\r\n      },\r\n      {\r\n        \"@type\": \"Answer\",\r\n        \"text\": \"C. Rolling an expiring futures contract forward will require buying fewer contracts to maintain the same dollar position in the futures markets.\"\r\n      }\r\n    ],\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The correct answer is B. In a commodity futures market exhibiting backwardation, longer-dated futures contracts are priced below near-dated contracts. As investors roll expiring contracts into lower-priced contracts further out on the futures curve, they must purchase more contracts to maintain the same dollar exposure. Backwardation is generally associated with a positive roll return, making answer A incorrect. Answer C is also incorrect because maintaining the same dollar position requires buying more, not fewer, contracts.\"\r\n    },\r\n    \"author\": {\r\n      \"@type\": \"Organization\",\r\n      \"name\": \"AnalystPrep\"\r\n    }\r\n  }\r\n}\r\n<\/script>\r\n<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>\r\n\r\n<div style=\"text-align: center; margin: 30px 0;\"><a style=\"display: inline-flex; align-items: center; justify-content: center; padding: 12px 26px; border-radius: 9999px; background: #1e5bd8; color: #ffffff; font-weight: bold; text-decoration: none;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Start Free Trial \u2192 <\/a><p style=\"margin-top: 12px; font-size: 16px; line-height: 1.5;\">Access CFA Level II alternative investments study notes, practice questions, mock exams, and video lessons to strengthen your understanding of roll returns in contango and backwardation markets.<\/p><\/div><!-- \/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 v27.6 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Contango, Backwardation &amp; Roll Returns | AnalystPrep<\/title>\n<meta name=\"description\" content=\"Learn how contango and backwardation affect futures prices, roll returns, and the performance of futures-based strategies.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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