CFA Level I Exam · Natural Resources

Commodity Futures Returns: Roll Yield, Collateral Yield and Spot Return

Q: What is the difference between contango and backwardation?

In contango the futures price is above the spot price, so the curve slopes upward. In backwardation the futures price is below spot, so the curve slopes downward. Contango gives a negative roll yield and backwardation gives a positive roll yield.

Q: How do you calculate roll yield on commodity futures?

Subtract the farther-term futures price from the near-term futures price. Divide by the near price if you want a percentage. The result is positive in backwardation and negative in contango.

Q: What are the components of commodity futures total return?

There are three: the spot price return, the roll yield, and the collateral yield. Collateral yield is the interest earned on the cash or securities posted as margin. You add the three parts to get total return.

Q: How does convenience yield affect the futures curve?

Convenience yield is the benefit of holding the physical commodity, such as keeping production running. A high convenience yield lowers the futures price relative to spot and pushes the market toward backwardation. Storage and financing costs push the opposite way, toward contango.

Updated 7 October 2026 · Fact-checked

A commodity futures position earns three returns: the spot price return, the roll yield, and the collateral yield on the cash posted as margin. Roll yield is positive in backwardation and negative in contango. Add the three parts to get total return. Check the sign of each part before you add.

Understand Commodity Futures Returns: Roll, Collateral and Spot Yield

A commodity futures contract lets you gain exposure to a commodity without holding the physical good. You post collateral, usually in cash or Treasury bills, and you earn interest on it. That interest is the collateral yield.

The second source is the change in the spot price. If crude oil rises from $80 to $84, the spot return is positive. Futures prices tend to follow spot prices, so you capture this move.

The third source is roll yield. Futures contracts expire. To keep the exposure, you sell the near contract and buy a later one. The roll gain or loss depends on the shape of the futures curve.

In backwardation, the futures price is below the spot price, so the curve slopes down. You sell the near contract at a higher price and buy the far contract at a lower price. Roll yield is positive. In contango, the futures price is above spot, so the curve slopes up. You sell low and buy high, and roll yield is negative.

The convenience yield is the benefit of holding the physical commodity, such as keeping a refinery running. A high convenience yield tends to push futures prices below spot, which leads to backwardation. High storage costs and interest costs tend to push the curve into contango. Total return = spot return + roll yield + collateral yield.

Key formulas to remember

Total return on a commodity futures position: Total return = spot price return + roll yield + collateral yield; Collateral yield is the interest earned on the cash or T-bills posted as margin.
Roll yield (per unit): Roll yield = near-term futures price − farther-term futures price; Positive in backwardation, negative in contango. Divide by the near price for a percentage.
Futures price with carry (cost of carry): F = S × (1 + r) + storage costs − convenience yield; A simple form, stated per period. Higher convenience yield lowers F relative to S. Backwardation (F < S) occurs when the convenience yield exceeds interest plus storage costs. Contango (F > S) occurs when it does not.
Curve shape rule: Contango: F > S. Backwardation: F < S; Compare the futures price with the spot price, or a far contract with a near contract.

How to solve Commodity Futures Returns: Roll, Collateral and Spot Yield questions

Use this order for any question on commodity futures returns.

1Identify what is asked: total return, one component, or the curve shape.
2List the given prices: spot at start and end, near futures, far futures.
3Decide the curve shape by comparing far with near prices (far higher means contango).
4Compute roll yield as near price minus far price, then convert to a percentage of the near price if needed.
5Compute the spot return as (ending spot − starting spot) ÷ starting spot.
6Identify the collateral yield from the interest rate given, adjusted for the period.
7Add the three components for total return, keeping every sign.
8Check that the answer matches the curve shape: contango should give negative roll yield.

Quickest way: Sign-first shortcut

When to use it: Use when options differ in sign or size and you want to eliminate two of the three choices fast.

Decide contango or backwardation first. This fixes the sign of roll yield.
Estimate roll yield as near minus far in your head.
Roughly add the spot return and the collateral yield.
Discard any option with the wrong sign for roll yield or the wrong order of magnitude.
Only compute fully if two options remain close.

Common mistakes in Commodity Futures Returns: Roll, Collateral and Spot Yield

Saying contango gives a positive roll yield.
Students see an upward curve and think it is good news.
Fix: In contango you sell the cheaper near contract and buy the dearer far one, so roll yield is negative.
Calculating roll yield as far minus near.
The order of subtraction is easy to reverse.
Fix: Use near minus far. Backwardation then gives a positive number.
Leaving out the collateral yield.
Futures need little cash up front, so students forget the interest on the collateral.
Fix: Total return always has three parts. Add the interest on the posted collateral.
Treating convenience yield as cash paid to the futures holder.
The word yield suggests an income payment.
Fix: It is a benefit of holding the physical commodity. It lowers the futures price relative to spot and does not flow to a futures holder.
Assuming futures converge upward to spot in contango.
Students mix up the direction of convergence.
Fix: At expiry the futures price equals spot. In contango, futures prices fall toward spot if spot is unchanged, which is why roll yield is negative.

Worked examples

Example 1

A commodity index investor holds a long position in oil futures. Spot rises from $80.00 to $84.00 over the year. At the roll date, the near contract the investor sells is priced at $80.50 and the next contract the investor buys is priced at $82.00. Collateral earns 2.0% over the year. What is the approximate total return? A) 4.8% B) 5.1% C) 8.9%

Show the solution

Curve shape: at the roll date the far contract ($82.00) is above the near contract ($80.50), so the market is in contango.
Roll yield = 80.50 − 82.00 = −$1.50. You sell the near contract at $80.50 and buy the far contract at $82.00. As a percentage of the near price: −1.50 ÷ 80.50 = −1.86%.
Spot return = (84 − 80) ÷ 80 = 5.00%.
Collateral yield = 2.00%.
Total = 5.00% − 1.86% + 2.00% = 5.14%, about 5.1%.
Option C (8.9%) adds the roll yield with the wrong sign: 5.00% + 1.86% + 2.00% = 8.86%. The correct sign gives 5.1%.

Answer: B) about 5.1%

Example 2

An investor in a backwardated copper market has a spot return of −3.0%, a collateral yield of 1.5%, and rolls from a near contract at $9,000 to a far contract at $8,910 per tonne. What is the total return? A) −0.5% B) 0.0% C) 2.5%

Show the solution

Curve shape: far ($8,910) is below near ($9,000), so the market is in backwardation.
Roll yield = 9,000 − 8,910 = $90 per tonne.
As a percentage of the near price: 90 ÷ 9,000 = 1.0%.
Spot return = −3.0% and collateral yield = 1.5%.
Total = −3.0% + 1.0% + 1.5% = −0.5%.

Answer: A) −0.5%

Exam tips

Questions are three-option MCQs, so fix the roll yield sign first and remove options with the wrong sign.
Expect a conceptual question linking convenience yield to backwardation and storage costs to contango.
Remember the total return has three parts: spot, roll, collateral. Check that the question did not already combine two of them.
Roll yield is near minus far, so keep the order and convert to a percentage of the near price when asked.
No calculator keystrokes are needed for most items; simple arithmetic is enough.

Practice questions from Natural Resources

Commodity Futures Returns: Roll, Collateral and Spot Yield in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CFA Level IICommodity Return Components and Roll Yield

Commodity Futures Returns: Roll, Collateral and Spot Yield: frequently asked questions

What is the difference between contango and backwardation?

In contango the futures price is above the spot price, so the curve slopes upward. In backwardation the futures price is below spot, so the curve slopes downward. Contango gives a negative roll yield and backwardation gives a positive roll yield.

How do you calculate roll yield on commodity futures?

Subtract the farther-term futures price from the near-term futures price. Divide by the near price if you want a percentage. The result is positive in backwardation and negative in contango.

What are the components of commodity futures total return?

There are three: the spot price return, the roll yield, and the collateral yield. Collateral yield is the interest earned on the cash or securities posted as margin. You add the three parts to get total return.

How does convenience yield affect the futures curve?

Convenience yield is the benefit of holding the physical commodity, such as keeping production running. A high convenience yield lowers the futures price relative to spot and pushes the market toward backwardation. Storage and financing costs push the opposite way, toward contango.