CFA Level I · CFA Level I Exam · Natural Resources
A commodity futures curve is in backwardation. An investor with a long position who rolls from the near contract to the next contract, with the spot price unchanged, most likely earns a roll yield that is:
The roll yield is positive. In backwardation, the far contract is priced below the near contract, so the investor sells the near contract at a higher price and buys the far contract at a lower price. This gain is the positive roll yield, even if spot prices are unchanged.
- Azero, because the spot price is unchanged
- Bnegative, because the far contract costs more
- Cpositive, because the far contract is cheaperCorrect
Explanation
In backwardation, deferred futures prices are below nearer prices. The investor sells the higher-priced near contract and buys the lower-priced far contract, giving a positive roll yield. A negative roll yield arises in contango.
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