CFA Practice Question
For the long investor, when the commodity market is in contango, the ______
A. roll yield is negative.
B. spot yield is positive.
C. collateral yield is negative.
Explanation: This is because the long investor is buying futures at a price higher than the spot price.
User Contributed Comments 6
| User | Comment |
|---|---|
| dipu617 | This is confusing. My understanding is opposite!! Anybody with an explanation? |
| Callie2 | Futures prices converge and ultimately equal the spot price at maturity. In Contango, the future price is higher than the spot price, but as we near maturity the future price will have to come down to meet the spot price. Think of the roll yield (pos or neg) as the direction the future price must go to meet the spot price at maturity. In contango (for a long investor), the roll yield is negative because the futures price must come down to meet the spot price. In backwardation, the future price is lower than the spot price. The roll yield is positive (for a long investor) because the futures price must increase to meet the spot price at maturity. |
| blink78597 | great explanation callie2 |
| jasonkwk | thanks callie2 |
| ChrisCat | yeah better than Schweser! |
| akirchner1 | Here is a rough example that may help paint a better picture. You currently hold the March contract for oil which trading at 60. You need to roll into the April contract which is trading at 61 (contango). So if you think of this like selling out of your March contract and buying the April contract you have a negative yield -1.7% (60 - 61)/60. |