In commodity futures market pricing, when the convenience yield is higher than the cost of carry, the roll yield is positive for:
Can someone explain to me why when the futures market is in backwardation, the futures price then generally rolls up (moves up along the forward curve) to the spot price curve as the expiry date of the futures contract approaches, which results in a positive roll yield for the long positions.
The futures price equals the spot price at expiration, so if it starts below the spot price it slowly rolls up to the spot as expiration approaches.
The roll yield is positive because if the spot price doesn’t move the futures price is higher at expiration than when you entered the position. Say you enter a futures contract with 1 month to expiration at a price of 70 and the spot is 75 (backwardated market). In one month the spot could still be 75 but the futures price (for your now at settlement date contract) will now also be 75, so you got yield from the term structure of the futures prices as opposed to the yield from collateral or spot price movements.