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

A firm rolls a long position in one-month futures each month in a market that remains in persistent contango with an unchanged spot price. What is the expected outcome of the rolling strategy?

The strategy has a negative roll yield. In persistent contango the futures price starts above spot and converges down to an unchanged spot price at expiry, so the long position loses value each month and the loss recurs at every roll.

  1. AA negative roll yield, as each contract is bought at a premium that converges down to spotCorrect
  2. BA positive roll yield, as each contract is sold at a premium to the one bought
  3. CNo roll yield, because the spot price is unchanged
  4. DA positive roll yield, as futures prices converge upward to spot

Explanation

In contango, futures trade above spot and converge down to spot at expiry if spot is unchanged, so a long roller loses on each roll. The positive-yield options describe backwardation.

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