CFA Level I · CFA Level I Exam · Natural Resources
A fund holds a long position in a commodity futures contract. The spot price stays unchanged, and the futures curve is in steep contango. Each month the fund rolls into the next contract. The roll return is most likely:
The roll return is most likely negative. In contango, the expiring near contract trades below the later contract, so the fund sells low and buys higher when rolling. Futures prices converge down toward an unchanged spot price, which creates a loss for the long position.
- AnegativeCorrect
- Bzero
- Cpositive
Explanation
In contango the nearby contract is cheaper than the deferred one. Selling the expiring contract at a lower price and buying the next one at a higher price, with the futures price converging to spot, produces a negative roll return for a long holder.
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