Question #14
Reading: Reading 32 Introduction to Commodities and Commodity Derivatives
PDF File: Reading 32 Introduction to Commodities and Commodity Derivatives.pdf
Page: 5
Status: Correct
Correct Answer: A
Question
The current spot price of a commodity is $85.20. An investor purchases a 6 month futures contract on the underlying commodity at a price of $84.80. Which of the following statements regarding the roll yield is most accurate?
Answer Choices:
A. Roll return will only be positive if the spot price drops below $85.20 at maturity
B. If the market stays in backwardation, the roll return will be positive regardless of the movement in spot price
C. Roll return will only be negative if the spot price drops below $84.80 at maturity
Explanation
Roll return reflects the convergence of the futures price to the spot price. When the
market is in backwardation (futures price below spot) the roll yield is always positive.