CFA Practice Question

There are 195 practice questions for this study session.

CFA Practice Question

When the market is in backwardation, the roll yield will be ______ for a hedger.
A. negative
B. positive
C. zero
Explanation: The long investor can buy the commodity below the current spot level from a hedger when it's time to roll forward the maturity of the derivatives position.

User Contributed Comments 12

User Comment
ledyba Can anyone explain, please? i understood the opposite.
xavi The hedger is already short the future and long the underlying. In backwardation producers are trying to lock in prices (sell) at an advantageous rate. Because they are hedging they are willing to give up a little gain to transfer risk so the future price is below spot. As the future approaches maturity this discount is reduced, the future price trades up to maturity. At the roll the hedge has to buy back the future at the higher rate (spot) and sell the far contract at a lower price. Hence for a hedger when the market is in normal backwardation the roll yield is negative. For an investor in the same situation the roll yield is positive. The key to this is the perspective- from either a hedger or an investor.
levonb xavi, thank you.
JimM Read the stupid question! Long position has positive roll yield in this situation, but it asked about the hedger, the opposite side.
Allen88 Thank you JimM for a very constructive comment.
CodyR You can actually hedge either direction, depending on if you're a supplier or a producer.
thekobe just define short or long position, question is asking for the short position
nfressell2 I agree with Cody
adamrej Actually, a hedger may be both long or short. If you're an airline you go long kerosene. If you're a producer you go short. The question does not specify the type of hedger.
ALOA123 Agreed that hedgers can be both Long and Short.
yanoshi I got confused because the question never specified whether you were hedging a long or short position. Both producers and consumers hedge.
dbalakos A hedger can be either long or short
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