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CFA Level I · CFA Level I Exam · Alternative Investment Performance and Returns

A commodity investor holds a long position in a futures contract on an industrial metal. The market is in backwardation, and the futures price converges to an unchanged spot price at expiry. When the investor rolls the position into the next contract, the roll yield is most likely:

The roll yield is most likely positive. In backwardation the nearer contract is priced above the later one, and the futures price converges upward toward spot. A long holder who rolls into the cheaper later contract earns that convergence as a positive roll yield.

  1. AZero, because the spot price did not change
  2. BPositive, because the nearer contract is priced above the later oneCorrect
  3. CNegative, because the later contract is priced above the nearer one

Explanation

In backwardation, futures prices are below spot and the later contract is cheaper than the near one. A long investor buys the cheaper contract, and the futures price rises toward the spot price, producing a positive roll yield. Negative roll yield occurs in contango.

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