Are trades always closed out using the opposite directional futures contract for same expiration date. Do people ever use spot? How do futures price and spot react to eachother? Why has the futures contract as of today (April 20th 2020) been hammered to a point it is negative?
My exam is approaching. I did not understand how under contango the price of the futures contract in Sep went down to 79.11? If it is contango, the future prices are above spot.
the problem is why bother with the assumption that this term structure doesn't change, of course it will change. What's the point of calculating roll return?
Yes, you have to add the spot price variation to get the full roll return. Roll Return = [Variation in the price of the contract] - [Variation in spot prices]. Example: June Contract, in Backwardation. April Price: 39.10 May Price: 40.58 Spot variation: 0.40 Roll Return = (40.58 - 39.10) - 0.40 = 1.08
Because of arbitrage. A 1 month contract expiring today (delivery is equal to spot) must have the same price as spot (why pay more than spot?), otherwise arbitrage opportunities exist. As the futures contract is approaching maturity, it will converge to spot. In Backwardation, futures prices are smaller than spot. So to converge, future prices increase until they reach spot.
Studying for my CAIA lvl2 and needed to see roll yield explained graphically. Mr.Turtle you are my hero!
I really like your videos, they explain complex things in a very easy way.
Keep on the great job!!
You sir, have saved me a lot head scratching!
I don't ever comment on any UA-cam video but thank you so much for making this video!! You made a topic so complicated into basically "ABC"
Thanks for giving a video that actually explains this concept to someone who is trying to learn, instead of just reminding someone of the concept.
@danycapetillo thanks for the encouragement, appreciated. I've resumed a M-W-F YT schedule. Cheers, David
Absolutely brilliant explanation!
Are trades always closed out using the opposite directional futures contract for same expiration date. Do people ever use spot? How do futures price and spot react to eachother? Why has the futures contract as of today (April 20th 2020) been hammered to a point it is negative?
thanks a lot David , amazing explanation.
Why would one choose to renew a future at a higher roll return? Is this because there will be an overall gain?
My exam is approaching. I did not understand how under contango the price of the futures contract in Sep went down to 79.11? If it is contango, the future prices are above spot.
Does this mean futures are a decaying asset (in contango)? The price of the futures will always drift downwards towards spot?
I think that's it.
the problem is why bother with the assumption that this term structure doesn't change, of course it will change. What's the point of calculating roll return?
the roll return is one component of the total return. The reason to bother is to break down (deconstruct) the return into its pieces
it impacts ETF's in a bad way you say in the beginning. Is that because the curve of crude oil lately shiftet from backwardation to contango?
Also just the fact that a lot of commodity ETFs invest in commodity futures
Why is it so hard to find a clear explanation like this? So many shitty material on the internet (Khan Academy, Investopedia). Congrats!
You assumed the spot price does not change here.
Yes, you have to add the spot price variation to get the full roll return.
Roll Return = [Variation in the price of the contract] - [Variation in spot prices].
Example:
June Contract, in Backwardation.
April Price: 39.10
May Price: 40.58
Spot variation: 0.40
Roll Return = (40.58 - 39.10) - 0.40 = 1.08
Thank you.
Futures prices must be increasing to converge back to SPOT for backwardation. Why ?
Either we make a well explained video or avoid it.
Because of arbitrage. A 1 month contract expiring today (delivery is equal to spot) must have the same price as spot (why pay more than spot?), otherwise arbitrage opportunities exist. As the futures contract is approaching maturity, it will converge to spot. In Backwardation, futures prices are smaller than spot. So to converge, future prices increase until they reach spot.
tks
Tnxx
such a bad illustration for roll return
Thank you
Thank you