What is Roll Yield?

What is Roll Yield?

Roll yield is the amount of return generated in the futures market after an investor rolls a short-term contract into a longer-term contract and profits from the convergence of the futures price toward a higher spot or cash price.

Roll yield is positive when a futures market is in backwardation, which occurs when a futures contract trades at a higher price as it approaches expiration, compared to when the contract is further away from expiration.

introduction of Roll Yield

Roll yield is a profit that can be generated when investing in the futures market due to the price difference between futures contracts with different expiration dates. When investors purchase futures, they have both the right and the obligation to buy the asset underlying the futures investment at a specified date in the future, unless they sell their position (to offset the long futures position) ahead of the delivery date.

Most futures investors do not want to take delivery of the physical asset that the futures investment represents, so they close the position before expiration or roll their near-term expiring futures investments into other futures contracts with expiration dates further in the future. Rolling the position allows the investor to maintain their investments in the assets without having to take physical delivery.

Calculating Roll Yield

In order to calculate roll yield, an investor needs to know the rates of the two futures contracts and the spot price of the underlying asset, which in this case, is a commodity. For example, assume that June soybean futures are trading at $100, while in July, they are trading at $95, the spot price being $100.

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Investor X expected the rates of soybean to either remain the same or increase. Therefore, she decided to roll the contract up to July, but on the date of the expiration, the spot price remains the same ($100). Investor X’s roll yield would be as follows:

  • Change in the Future’s Price = $100 – $95 = $5
  • Change in the Spot Price = $100 – $100 = $0
  • Roll Yield = $5 – $0 = $5