hard · FRM Part 1 Financial Markets and Products
A trader holds a long position in a futures contract on a non-dividend commodity that exhibits a strongly upward-sloping forward curve (contango). The trader funds the position and maintains it by rolling the front contract into the next maturity each month; daily variation margin is invested or borrowed at the risk-free rate.
Holding the commodity's spot price path fixed, which effect most directly erodes the total return of this rolling long position relative to the change in spot price?
- Negative roll yield: as each expiring contract converges up toward the higher next-month price, the trader systematically sells the cheaper expiring leg and buys the pricier deferred leg across rolls, even with spot unchanged.
- Convenience yield accruing to the long futures holder, which is paid away to the short counterparty and reduces the long's mark-to-market gains over the holding period.
- Daily marking-to-market correlation: the positive correlation between futures prices and the financing rate raises the futures price above the forward price and lowers the trader's entry cost each roll.
- Negative carry from storage costs that the long futures holder must pay directly to the warehouse during the life of each contract while awaiting roll.
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