So a commodity return is the spot return, collateral yield and roll return… This assumes you own the commodity and are writing futures on it, or you own a futures commodity contract? (I assume the later) Also, if you roll the contract forward, how do you make money, don’t you have to sell the current contract and buy a new contract? If this case, I get how you make the spot return and collateral yield, but not the roll return part. Thanks.
it might be easier to look at the formula roll return = (F1 - F0) - (S1 - S0) assume collateral return is 0 for now total return = roll return + spot return = (F1 - F0) - (S1 -S0) + (S1 - S0) = F1 - F0 take the collateral return in, say it’s risk-free total return = RF interest + F1 - F0. just a plain futures return formula. cfai breaks it into three parts to have more stories to tell, but the only thing you need is a single futures contract.
I thought tt should be stated Total Return = S1-S0 + Rf + Roll Yield
why do you measure roll yield with f0 and f1? shouldn´t you use f2? i mean, i buy @ f0, sell @ f1, and buy a new one @ f2 if f2 is higher than f1, the difference between f2 and f1 “eats” part of my profit of f1-f0 if f2 is lower than f1, the difference is more profit as “I am buying cheaper”
bigwilly Wrote: ------------------------------------------------------- > I thought tt should be stated > > Total Return = S1-S0 + Rf + Roll Yield sure. then you can continue with = (S1-S0) + Rf + [(F1-F0) - (S1-S0] = Rf + F1 - F0
So the Roll Yield is F1-F0 - s1-S0
hala_madrid Wrote: ------------------------------------------------------- > why do you measure roll yield with f0 and f1? > shouldn´t you use f2? > > i mean, i buy @ f0, sell @ f1, and buy a new one @ > f2 > > if f2 is higher than f1, the difference between f2 > and f1 “eats” part of my profit of f1-f0 > > if f2 is lower than f1, the difference is more > profit as “I am buying cheaper” at time 0, you only konw F0; at time 1, you only have F1, if at time 0, you know F1 and at time 1 you know F2, you will be really really rich …
F1-F0 - s1-S0 -> yes that is correct as roll yield is yield if S was fixed IMHO
Could someone prove that roll return is only positive in backwardation? I tried, but could not figure it out. Assume 1 year forward, with const rfr, with convenience yield c, F0 = s0 * exp(r - c) F1 = s1 * exp(r - c) So, F1-F0 > s1 - s0 means 1) if s1-so < 0, we need exp(r-c) < 0 --> backwardation 2) if s1-s0 > 0, we need exp(r-c) > 0 --> contango
This was interesting thread from last year, but has anyone figured out why the addition of Spot Return appears to be deleted from Total Return calculation of answer to: CFAI question #31 (p.125, vol 5)? If: Total Return = Roll Rtn + Collateral Rtn + Spot Rtn And: Roll return/Yield = End futures price - Begin futures price - Change in spot price And: End futures price = 40.76 Begin futures price = 39.07 Change in spot price = 0.90 Collateral Rtn = 0.15 Then: Wouldn’t Total Return = [(40.76 - 39.07) - 0.90] + 0.15 + 0.90 = 1.84? The book leaves out the last 0.90 and says answer is: [(40.76 - 39.07) - 0.90] + 0.15 = 0.94.
Maybe this should be a new thread… (and why didn’t I answer elcaro’s question in June?) Anyway, the collateralized futures return is broken down into those three components. If you own the futures contract and know what the return is on the futures contract, you don’t care what the spot does. For instance, if I buy an Dec 2009 corn contract at 380 and it goes to 385 my return on the futures contract has nothing to do with spot corn (note that Dec 2009 corn hasn’t even been planted yet). My return on a collateralized contract includes whatever interest I earn on the margin account balance.
Thanks Joey, but I guess I’m just confused b/c the text only teaches us to apply the 3-component formula to arrive at total return, and not the exceptions to the rule. How do we know if we ‘own’ the futures contract (and to not add the spot rate)? The question only says to assume that you have a “fully collateralized futures position.” Is this the same as ‘owning’ the contract?
A fully-collateralized futures contract is something that nobody really does, but it’s something that should return exactly the same amount as owning the commodity.
Thanks Joey