Alternative Investments by CFA Institute;

Author:CFA Institute; [Wiley]
Language: eng
Format: epub
ISBN: 9781119850625
Publisher: John Wiley & Sons, Incorporated
Published: 2020-09-22T00:00:00+00:00

EXAMPLE 17 Total Returns for Futures Contracts (1)

A commodity futures market with pricing in backwardation will exhibit which of the following characteristics?

The roll return is usually negative.

Rolling an expiring futures contract forward will require buying more contracts in order to maintain the same dollar position in the futures markets.

Rolling an expiring futures contract forward will require buying fewer contracts in order to maintain the same dollar position in the futures markets.

Solution: B is correct. Commodity futures markets in backwardation exhibit price curves in which longer-dated futures prices are priced lower than near-dated contracts and the nearest-dated contract is priced lower than the current spot price. With a lower futures price on the futures curve, rolling contracts forward in backwardation would require purchasing more contracts to maintain the same dollar position. A is incorrect because the roll return is usually positive, not negative, in markets in backwardation. C is incorrect because an investor would need to purchase more, not fewer, contracts in markets in backwardation to maintain his or her total dollar position.

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