CFA mock AM Q25 - roll yield occurs, positive, understand, like, buying

CFA4Techie

Their explanation makes no sense to me...they say:

positive “roll yield” occurs when the futures price is above the “full carry” price, referred to as backwardation.

If futures prices are above the carry prices then aren't you buying overpriced futures? Sounds like negative roll yield to me...

Anyway, I understand how B could be the answer here, based on producers worried about prices dropping further...however, I would think that A could also be the answer. If you didn't have low storage costs then your futures curve would be in contango and your roll yield would be negative.

What am I missing?

yalo

Glad I saw this cuz their explanation drove me nuts.

Think they did that on purpose so they can screw people over? Plus no errata.

Totally unfair.

Thanks for bringing this up, Ceredwyn.

lucasg85

If the market is in contango, then there is a negative roll yield.

Analyze_This

Here's my take:

A) few limitations to storage--> this may or may not be true. if something has few storage limitations, this just means that there's no FV(NC). but to get a FP that is actually less than S you need a high convenience yield.

C) prices that are volatile and at historic highs --> if prices are high, producers are living the good life. there's no need to hedge. if prices go up even more, that's great. if they fall a little, no big deal, because prices are at historical highs anyway


B) prices that are volatile and at historic lows --> you're a producer and prices have been falling and falling. youre scared shitless of them falling even more so you hedge your product (i.e. wheat). to entice speculators to take on your risk, you have to give them a lower price, otherwise they wont take it. So F < S.


This is why B is correct. With that said, only the last sentence of their answer makes sense to me. The beginning is either wrong or above my head, but I don't see how it is a true statement that "positive roll yield occurs when the futures price is above the full carry price."



Edited 1 time(s). Last edit at Monday, May 31, 2010 at 03:39PM by the show NY.

WarrenB1

only futures trading at backwardation (price below spot price) receive the roll yield

Newhuman

Haven't seen an errata on this yet nor a decent explanation. I would ignore this one for now.