CFA Level I · CFA Level I Exam · Natural Resources
An investor holds a long position in a commodity futures contract and rolls it forward each month while the market is in backwardation. Ignoring changes in the spot price, the roll return is most likely:
The roll return is most likely positive. In backwardation the expiring near-term contract is priced above the next contract, so selling it and buying the cheaper later contract generates a gain. A negative roll return would occur in contango instead.
- Anegative, because the investor buys a higher-priced contract.
- Bzero, because the spot price is unchanged.
- Cpositive, because the investor sells the expiring contract at a higher price than the new one costs.Correct
Explanation
In backwardation, the near contract trades above the longer-dated contract. Selling the expiring contract and buying the cheaper later one produces a positive roll yield. Negative roll yield arises in contango.
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