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FRM Part I · FRM Exam Part I · Futures Markets

A speculator is long a nearby futures contract and rolls into the next maturity. The nearby is priced at 100.0 and the next at 103.0, with the market in contango. If spot prices are unchanged and the curve shape persists at each roll, which result is most likely over successive rolls?

A negative roll yield. In contango a long holder sells the cheaper nearby contract and buys the more expensive deferred one, which converges down to an unchanged spot price, so each roll produces a drag on returns.

  1. AA negative roll yield, as the position repeatedly sells low and buys higher-priced contracts that converge down to spotCorrect
  2. BA positive roll yield, as the position buys contracts that rise toward spot
  3. CZero roll yield, because futures converge to spot at expiry
  4. DA positive roll yield, because contango means spot exceeds futures

Explanation

In contango the deferred contract is priced above the nearby. Rolling means selling the nearby at 100 and buying the next at 103. With spot unchanged, the new contract converges down toward spot, losing value, so roll yield is negative. Contango means futures exceed spot, so the last option is false.

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