roll yield This is a topic that many people are looking for. newyorkcityvoices.org is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, newyorkcityvoices.org would like to introduce to you Understanding Roll Return. Following along are instructions in the video below:
“Return is an important source of return in commodity futures investing. But it is also also often a source of confusion this short animation provides a visual explanation of roll. Which is driven by the difference in price between shorter dated closer to maturity commodity contracts and longer dated contracts this chart is an illustration of the relationship between price and expiration date for all futures contracts of a particular commodity say oil gold or corn the dots nearest the y axis represent the closest to maturity contracts with maturity increasing as you go to the right. When the prices of longer dated.
Contracts are higher than the prices of shorter dated contracts as we see here. The commodities future curve is said to be in contango contango..
Occurs due to costs incurred by the commodity owner for holding and storing. The commodity. An investor looking to invest in this commodity will select a particular contract to purchase in this case. We ll select the longest dated contract.
However any of these contracts can be chosen from a roll return perspective due to the shape of the curve. As time passes..
The price of the contract will fall or roll down towards the price of the next nearest contract. Which itself will fall to the next contract. And so on and so forth. This is the roll return and in the case of contango.
The return is negative since the price is falling in the future to maintain commodity exposure. The investor will choose to sell the current contract or wait for it to expire and then reinvest in a longer dated contract thus repeating the cycle..
But what happens if the curve is downward shaped. When the prices of longer dated contracts are lower than the prices of shorter dated contracts. The commodity curve is said to be in backwardation this can happen when the current inventory of a commodity is low for example. If a drought causes.
A poor harvest corn for the current season will be in short supply causing. The price of near term contracts to be high relatives contracts related to next year s harvest..
Which will be unaffected by the current weather in a backward dated market due to the shape of the curve the price of a longer to expire. Contract will roll up toward the price of the next nearest contract by purchasing a contract with a lower price and selling it at a higher price and invest earns a positive roll return roll return is one important source of return for commodity futures. But it is only one source. The important thing for investors to remember is that roll return provides a glimpse into the expected price movement of a commodity futures contract whether that be a drop in price from contango or a rise in price from backwardation.
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