Roll return

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derswap07

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Here total return = spot return + collateral return + roll return.
If the forwrad curve in in backwardation (negative), who will have greater roll return- the long or the short position? assuming everything else is the same?
 
In backwardation the futures curve is upward slowing and a long position would roll backwards down the curve buy selling short dated futures at a higher price and buying longer dated futures at lower price. If you are short position then the opposite is true and you are losing money on the roll back…
I think this is correct.
 
backwardation: F(0) < S(0)
At T: F(T) = S(T)
Roll-Return: = (F(T) – F(0)) – (S(T) – S(0)) > 0
>>> Profit for the Long Position
 
S2000, I have a sticking point on this backwardation vs contango… I have looked at some graphs of the curves and can see that the futures curve is upward sloping for backwardation..but you (and books) saythat it is downward sloping.. . I am obviously missing something fundamental.
Is the graph below not showing the futures curve? And is the backwardation not upward sloping?…..
thanks!
 
S2000magician wrote:
JJ1337 wrote:
UpUpDownDown wrote:backwardation: F(0) < S(0)
Click to expand...
I would not say that this is per se correct. See my post here: http://www.analystforum.com/forums/cfa-forums/cfa-level-iii-forum/91340123
However, I am still confused, too.
Click to expand...
It is correct; it’s the definition of backwardation: forward (futures) price is lower than spot price: the forward curve slopes downward.
Click to expand...
Jep, I also think that it is more or less correct. However, I don’t get this one:
JJ1337 wrote:
However, when it comes to currency (I refer in the following to the base currency and price to base nomenclature) we speak of backwardation if the spot exchange rate is below the forwards exchange rate (i.e., S_0<F_0) and the long earns a negative rol yield.
Click to expand...
 
pokhim wrote:
S2000, I have a sticking point on this backwardation vs contango… I have looked at some graphs of the curves and can see that the futures curve is upward sloping for backwardation..but you (and books) saythat it is downward sloping.. . I am obviously missing something fundamental.
Is the graph below not showing the futures curve? And is the backwardation not upward sloping?…..
thanks!
Click to expand...
There are a couple of points here.
First, the green curve is not defined as backwardation; it’s normal backwardation, which is different.
Second, the curves here do not depict today’s forward curves; they depict what happens to forward prices as we move into the future. In contango, the forward price is above the spot price (as shown by the “Today” points). As we move into the future, the forward price and the spot price have to converge, so, assuming that the spot price remains unchanged, the forward price will have to decrease. The opposite is true for backwardation.
It’s a lousy graph; the upper curve should be described as normal contango, not contango.
In any case, it’s not a graph showing how forward prices today compare to today’s spot price.
 
pokhim wrote:
S2000, I have a sticking point on this backwardation vs contango… I have looked at some graphs of the curves and can see that the futures curve is upward sloping for backwardation..but you (and books) saythat it is downward sloping.. . I am obviously missing something fundamental.
Is the graph below not showing the futures curve? And is the backwardation not upward sloping?…..
thanks!
Click to expand...
This is important. What the graph appears to be showing is what happens to the price of the contract as time goes by if the futures market is stagnant in contango or backwardation with no change in spot. Just my guess. Not clearly presented. Expect to see graphs presented in none standard terms. And questions that require you to mentally shift the curves.
 
S2000magician wrote:
pokhim wrote:
S2000, I have a sticking point on this backwardation vs contango… I have looked at some graphs of the curves and can see that the futures curve is upward sloping for backwardation..but you (and books) saythat it is downward sloping.. . I am obviously missing something fundamental.
Is the graph below not showing the futures curve? And is the backwardation not upward sloping?…..
thanks!
Click to expand...
There are a couple of points here.
First, the green curve is not defined as backwardation; it’s normal backwardation, which is different.
Second, the curves here do not depict today’s forward curves; they depict what happens to forward prices as we move into the future. In contango, the forward price is above the spot price (as shown by the “Today” points). As we move into the future, the forward price and the spot price have to converge, so, assuming that the spot price remains unchanged, the forward price will have to decrease. The opposite is true for backwardation.
It’s a lousy graph; the upper curve should be described as normal contango, not contango.
In any case, it’s not a graph showing how forward prices today compare to today’s spot price.
Click to expand...
How do you define Normal Backwardation vs. Backwardation?
Only definition i’ve been able to find is during cases where backwardation is evident due to natural market conditions where they (the author) would call this market structure “Normal”, not due to shortage of the product.
 
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