CFA Level I · CFA Level I Exam · Natural Resources
A commodity futures curve is in contango because of high storage costs. Compared with a spot-only investment in the commodity, a long investor in near-dated futures who rolls each month will most likely experience:
A long investor rolling in contango most likely suffers a drag from a negative roll yield. The expiring contract is sold at a lower price than the next contract costs, so each roll loses value relative to the spot price change, even though futures converge to spot at expiry.
- Aa drag on returns from a negative roll yield as contracts are rolled forwardCorrect
- Ban enhancement of returns from buying contracts at lower prices than the expiring one
- Creturns identical to the spot price change because futures converge to spot at expiry
Explanation
In contango the next contract costs more than the expiring one, so rolling means selling low and buying high, creating a negative roll yield. Convergence at expiry does not remove this cost, because each roll buys a more expensive contract.
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