Roll Return - easy question!

[Onestar]

Hello Guys
The Schweser notes (p.168) state that “the positive roll for the short position does not depend on whether the spot price increases or decreases.”
I don’t understand how that is possible, i.e.

S: USD/GBP = 1.04
F: USD/GBP = 1.05

If you were to sell £1m six-month forward for USD/GBP 1.05; if the spot rate stayed the same at 1.04, you would earn positive roll yield of $10,000.

However, if the spot rate in six-months time turned out to be 1.06, surely your roll yield would be negative because you have made a loss of $10,000? (You are getting $1,050,000 for £1m instead of $1,060,000).

Sorry my brain is a bit slow this week, am I missing something!?!

 

[onlysimon]

i think it’s simply because you are entering into the forward contract so the spot price is not part of the equation.

 

[Onestar]

So theoretically, you could have positive roll return but at the end of the contract make a loss?

 

[onlysimon]

when you enter the forward contract no money changes hands.
on value date, you roll the position (i.e. near/far leg swap), you collect the roll return.
you keep doing this.. until..GBP becomes worthless
you are short the contract, so you decide to collect the $1m and pay 1mGBP which you buy spot for peanuts.
scenario 2, GBP skyrockets.
ok, you could continue rolling, but your broker will get concerned, decide to close at a loss.
so schweser is correct in that the roll is not related to spot. but closing the position does include spot.
(thats from my L2 memories, didn’t get to this book yet)

 

[klinko88]

It’s attempting to say that you short at 1.05 and in 6 months the price converges back to 1.04 (current spot). Basically it holds spot constant, and the difference between spot and forward prices is due to interest rates.
If spot moves, it’d be classified as some other type of “return”, or just market movements.
So it’s mostly semantics, just breaking down positions and trades into different types of return.