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CFA Level I · CFA Level I Exam · Natural Resources

A fund holds a long position in commodity futures in a market where near-dated contracts trade at lower prices than far-dated contracts. Assuming the spot price is unchanged and the fund rolls the position at expiry, the roll return is most likely:

The roll return is most likely negative. In contango, the expiring contract is sold at a lower price and a more expensive longer-dated contract is bought, so convergence toward an unchanged spot price erodes returns for the long holder.

  1. Apositive, because the fund buys cheaper contracts at each roll
  2. Bzero, because the spot price is unchanged
  3. Cnegative, because the fund sells low and buys higher-priced contractsCorrect

Explanation

This is contango. When rolling, the expiring near contract is sold at a lower price and the next contract is bought at a higher price. With the spot unchanged, the futures price converges down toward spot, so the roll return is negative. The positive-roll idea applies to backwardation.

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