Roll yield

CFA Level III Fixed Income
#1

After doing some mocks, I think I become confused. I don’t know now if I know what roll yield is :-|. Please help

Which one is the right formula of roll yield

(1) roll yield = (S0,P/B - F0, P/B) / S0,P/B (2) roll yield = (ST,P/B - F0, P/B) / S0,P/B (3) roll yield = (F0, P/B - S0,P/B) / S0,P/B

with

  • S0,P/B : spot price at time t = 0, P: price currency, B: base currency
  • F0, P/B : forward price T defined at time t = 0
  • ST,P/B : spot price at time t = T (in the future)

Thanks,

#2

The answer, unfortunately, depends on which reading you cite.

I presume that this comes from the currency management reading; if so, then it should be (3).

However, this is not the customary definition of roll yield, which is correctly defined in one of the Level III commodities readings.

There is a commodities reading at Level I and a commodities reading at Level II each of which has an incorrect (i.e., not the customary definition) of roll yield, which are different from each other, and neither of which agrees with the (equally incorrect) definition from the Level III currency management reading.

Sigh.

#3

1 and 3, depending on if you’re short or long the futures contract.

#4

@S2000magician: yes, for commodity roll yield, the formula for roll yield is

Roll yield = (F_t_ − F_t−1) − (St_ − S_t_−1) (4)

and I think that (just to please the CFA Institute :smiley: )

  • for commodity, we should apply the formula (4)
  • for currency, we should apply the formula (3) as you said above

Roll yield = (F0, P/B - S0,P/B) / S0,P/B (3)

with S0,P/B : spot price at time t = 0, P: price currency, B: base currency F0, P/B : forward price T defined at time t = 0

The formula (3) is for short forward the base currency.

#5

Correct on all counts.

#6

Thanks magician :slight_smile:

#7

D’accord.