Roll Return (Mock 2016 Q53)

CFA Level II Alternative Investments
#1

Someone please kindly explain to me in layman terms, why is C correct?

I always thought backwardation(contango) generates positive(negative) roll returns… What is the answer trying to say here ??

[question removed by moderator]

#2

Someone please help…

#3

I had the same issue with this question. If I remember correctly, I thought that B and C were saying that same thing but in the opposite way…

#4

Bump, having the same issues. Thought B and C were correct. Why is C correct and not B?

#5

Question is wrong…

#6

Nice, that means I can add that as correct and bump up my mock scores

#7

I got the answer right on my initial go through, but was going back and forwth between A & C could someone explain why A wouldn’t be correct? Taken directly from schweser LOS 42 A

In line with the theory of storage, nonstorable commodities like “energy” and livestock exhibit positive roll returns, while highly storable comodities like industrial and precious metals and " agricultural commodities" generally have negative roll returns."

Thanks!

#8

The answer is C and the explanation is quite straight forward. When futures markets are in backwardation (like w. the energy subindex), then you roll into the new futures contract at a less expensive cost compared to spots (which is why the roll return is positive when futures are trading in backwardation)

#9

In backwardation the futures price is lower than the spot price.

When the contract approaches it expiration the trader may still want to be long the contract, therefore in order to prevent from being delivered a barrel of oil for example, he will need to roll his future contract into the next one. Because the market is in backwardation the future price will be lower, therefore when you come out of your current contract you enter into the next one at a cheaper price which therefore causes a positive roll return

#10

There is an error on the exam. They corrected it. This had been asked at least 10 times in this forum.

#11

But what about the statement that roll return of the agricultural subindex is negative when the agricultural futures market has been in contango. Since it’s in contango, an investor would have to sell the index and buy at a higher price.

Therefore, negative roll return? Why is this wrong?

#12

+1