Study session 13 schweser material

[iamthenight]

for a commodity futures contract
total return = spot return + collateral return + roll return
Eg.
the change in price on a futures contract is $6, the spot return is $3, and the collateral return is $1. Calculate the roll return
ANSWER (as given by text book)
roll return = change in futures price - spot return = $6-$3 = $3
Question is why is the collateral return not considered as per the equation above?
eg. the answer roll return = change in futures price - spot return - collateral reutn = $6-$3-$1 = $2
Thanks!

 

[cpk123]

• collateral return is what the margin money invested at the risk free rate earns. that is not a part of what is earned due to rolling over the contract from one period to the next (which is the roll return).
• assuming the same margin money is used - you are earning some amount due to backwardation (Spot price is less than Futures Price – Hope I am getting this right). That amount is purely due to the Change in Futures Price - Change in Spot Price (which is the Spot Return).

 

[iamthenight]

nice explaination
thanks!