Hi all this question was asked in the mock
" The VIX futures curve is in contango, and VIX futures will experience rolldown losses if volatility remains unchanged over the term structure."is this correct?
I wrote that it was b/c contango means futures prices are higher than current spot. This means you will face higher roll costs b/c it gets more expensive to maintain the same position. The answer was “If the VIX futures curve is in contango and volatility remains unchanged during the term
structure, the VIX futures price will converge toward the VIX spot price, and both futures
and spot price will decline as they approach expiration. Hence, the trader who is long
VIX futures would realize roll-down losses”
While I understand that maintaining a long position in a position whose price is declining makes you lose money the question is specifically about roll down costs. If the costs to roll down is lesser than you gain in roll down costs but lost in overall value of the position itself right? Why has it been explained like this? Isn’t my answer the correct/obvious way of explaining this?
Thanks Bill, yes typo there. Do you mind checking my question on contango confusion that i posted sometime back. This one is still bothering me
Hi all this question was asked in the mock
" The VIX futures curve is in contango, and VIX futures will experience rolldown losses if volatility remains unchanged over the term structure."is this correct?
I wrote that it was b/c contango means futures prices are higher than current spot. This means you will face higher roll costs b/c it gets more expensive to maintain the same position. The answer was “If the VIX futures curve is in contango and volatility remains unchanged during the term
structure, the VIX futures price will converge toward the VIX spot price, and both futures
and spot price will decline as they approach expiration. Hence, the trader who is long
VIX futures would realize roll-down losses”
While I understand that maintaining a long position in a position whose price is declining makes you lose money the question is specifically about roll down costs. If the costs to roll down is lesser than you gain in roll down costs but lost in overall value of the position itself right? Why has it been explained like this? Isn’t my answer the correct/obvious way of explaining this?
I’m not sure why the spot price will decline if volatility remains unchanged.