CFA Level I · CFA Level I Exam · Natural Resources
A commodity futures market is in backwardation. An investor holding a long position who rolls from the near contract to the next contract will most likely earn a roll return that is:
The roll return is most likely positive. In backwardation the near contract trades above the next one, so the investor sells the expiring contract at a higher price and buys the later contract at a lower price, capturing a gain from the roll.
- Apositive, because the investor sells the near contract at a higher price than the price paid for the next contractCorrect
- Bzero, because spot prices are unchanged
- Cnegative, because the next contract is priced above the near contract
Explanation
In backwardation, the near-term futures price is above the longer-dated price. Selling the expiring contract at the higher price and buying the next contract at the lower price gives a positive roll return. The negative case describes contango.
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