CFA Level I · CFA Level I Exam · Natural Resources
Which factor is most likely to cause a commodity futures curve to be in backwardation, giving a positive expected roll return?
A high convenience yield relative to the cost of carry most likely causes backwardation. The benefit of holding the physical commodity lowers the futures price below spot, so later contracts trade cheaper than near ones. High storage costs and ample inventories point toward contango instead.
- AHigh storage costs and ample inventories
- BA high convenience yield relative to the cost of carryCorrect
- CLow interest rates on collateral
Explanation
Futures price is approximately spot plus financing and storage minus convenience yield. When the convenience yield is large relative to these costs, the futures price falls below spot and the curve slopes downward. High storage costs and ample inventories push toward contango.
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