Skip to content

FRM Part I · FRM Exam Part I · Commodity Forwards and Futures

A commodity trader holds a long position in a futures contract and rolls it each month in a market that stays in steep backwardation, with spot prices unchanged over time. Which outcome is most likely from the rolling strategy?

The long investor earns a positive roll yield. In backwardation the expiring near contract trades above the deferred contract, so selling it and buying the cheaper next contract produces a gain at each roll, even with unchanged spot prices.

  1. AA positive roll yield, as the expiring contract is sold at a price higher than the new contract boughtCorrect
  2. BA negative roll yield, as the expiring contract is sold at a price lower than the new contract bought
  3. CZero roll yield, since spot prices are unchanged
  4. DA positive roll yield only if the convenience yield falls

Explanation

In backwardation, near contracts are priced above deferred ones. Selling the expiring (higher) contract and buying the next (lower) contract gives a gain that is a positive roll yield, and with spot unchanged the futures price converges up toward spot. Contango would give the opposite.

Did you get it right without looking?

One question tells you little. A timed set on Commodity Forwards and Futures shows your real accuracy, how long you take and where you lose marks.

Practise Commodity Forwards and FuturesFree diagnostic mock

More Commodity Forwards and Futures questions