Roll return

[PierreCFA]

In the Finquiz mock test, the roll return ($) is calculated as: Roll return = Delta (FuturePrice) - Delta (SpotPrice) with Delta(Spot price) is the price change over a period (1 month for example).

I don’t know if this formula is correct, because I know that roll return (%) = (SpotPrice - ForwardPrice)/ SpotPrice (so, the roll return () may be **Roll return () = SpotPrice - ForwardPrice** )

I wonder whether the formula in Finquiz is wrong.

Thanks

[S2000magician]

Last year I wrote an article on roll yield (roll return) that covers this: http://www.financialexamhelp123.com/roll-yield-roll-return/

(Full disclosure: as of 4/25/16, there is a charge to read the articles on my website. You can get an idea of the quality of the articles by looking at the free samples here: http://www.financialexamhelp123.com/sample-articles/.)

The problem is that different authors define roll yield differently, so there are inconsistencies in the curriculum. (Go ahead: prove to me that you’re surprised.)

As of the 2017 curriculum (I haven’t checked this year’s),

• There is a commodities reading at Level I that defines roll yield as the difference between the spot price and a futures price, or the difference between two futures prices with different expirations.
• There is a commodities reading at Level II that defines roll return by comparing the prices of two futures contracts: the near-term futures price minus the farther-term futures price. It further divides this difference by the near-term futures price to get the roll return as a percentage.
• There is a currency management reading at Level III that defines roll yield as the (absolute value of) the difference between the spot price and a futures price, that difference being divided by the spot price to get the roll return as a percentage.
• There is a commodities reading at Level III that defines roll yield as I have done here: the difference between the forward premium on the new contract and the forward premium on the old contract when the old contract expires and is rolled over to the new contract.

The short answer is that Finquiz’ formula is, in fact, correct, and the one that _ you know _ is, in fact, wrong; however, each appears in the curriculum, so it’s not entirely your fault.

[PierreCFA]

@S2000magician

Last year I wrote an article on roll yield (roll return) that covers this: http://www.financialexamhelp123.com/roll-yield-roll-return/

(Full disclosure: as of 4/25/16, there is a charge to read the articles on my website. You can get an idea of the quality of the articles by looking at the free samples here: http://www.financialexamhelp123.com/sample-articles/.)

The problem is that different authors define roll yield differently, so there are inconsistencies in the curriculum. (Go ahead: prove to me that you’re surprised.)

As of the 2017 curriculum (I haven’t checked this year’s),

• There is a commodities reading at Level I that defines roll yield as the difference between the spot price and a futures price, or the difference between two futures prices with different expirations.
• There is a commodities reading at Level II that defines roll return by comparing the prices of two futures contracts: the near-term futures price minus the farther-term futures price. It further divides this difference by the near-term futures price to get the roll return as a percentage.
• There is a currency management reading at Level III that defines roll yield as the (absolute value of) the difference between the spot price and a futures price, that difference being divided by the spot price to get the roll return as a percentage.
• There is a commodities reading at Level III that defines roll yield as I have done here: the difference between the forward premium on the new contract and the forward premium on the old contract when the old contract expires and is rolled over to the new contract.

The short answer is that Finquiz’ formula is, in fact, correct, and the one that _ you know _ is, in fact, wrong; however, each appears in the curriculum, so it’s not entirely your fault.

Thanks S2000magician.

So, in exam, perhaps I must use the formula (1) if the topic of the item sets is “Alternative Investment”

Roll Yield($) = Change in futures price - change in the spot price (1)

and the formula (2) if the topic is “Currency Management” ?

Roll Yield($) = | Spot price - Future Price| (2)

PS: As the definition of roll yield is not consistent, I guest it’s least likely that we will have questions about roll yield in the exam.

[S2000magician]

@PierreCFA

Thanks S2000magician.

So, in exam, perhaps I must use the formula (1) if the topic of the item sets is “Alternative Investment”

Roll Yield($) = Change in futures price - change in the spot price (1)

and the formula (2) if the topic is “Currency Management” ?

Roll Yield($) = | Spot price - Future Price| (2)

Only if you want to earn all of the points on that question.

@PierreCFA

PS: As the definition of roll yield is not consistent, I guest it’s least likely that we will have questions about roll yield in the exam.

I just received from a candidate her answers to the morning session from the 2017 exam (the real exam) which I’ll be grading for her. Question 1A asks you to calculate a collateral return and a roll return.

I’d say that you’ve made a bad guess.