Roll return
What a commodity futures position earns or loses purely from rolling contracts forward as they expire. Over years it can outweigh the price itself.
Where you will meet it
Roll return appears in 5 learning outcomes on the CFA syllabus. A few of them:
- Explain what drives the returns earned on a commodity futures position
“Roll return arises because a futures position must be rolled forward as contracts expire: it is positive in backwardation, where the futures price is below spot, and negative in contango, where it is above.”
- Analyse how spot and futures prices relate when markets are in contango and when they are in backwardation
“The trap is reading contango as a forecast that spot prices will rise: the slope mostly reflects carry costs and the balance of hedging demand, not expected price change, and a long investor rolling positions in contango earns a negative roll return each time.”
- Explain roll return and its link to how the futures curve is shaped
“In contango the futures price exceeds the spot price and the position sells a cheap expiring contract to buy a more expensive further one, producing a negative roll return that erodes performance even if spot prices are flat.”
- Set out, work out and interpret each part of the total return on a fully collateralised commodity futures contract
“Roll return arises when the expiring contract is sold and the next one bought: (near-term price − farther-term price) ÷ near-term price, times the share of the position rolled.”
Practise it
Practise roll return until it is automatic: questions that explain every wrong option.
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