Roll Yield
Roll Yield refers to the return generated from rolling over futures contracts in markets with backwardation or contango.
It is observed when futures contracts are rolled over before expiration, and the yield depends on the market structure. In backwardation, roll yield is positive as new contracts are cheaper than expiring ones, contrasting with contango where roll yield is negative.
Why Roll Yield Matters
Roll yield is crucial in assessing the profitability of futures-based strategies:
- influences total returns from futures investments
- affects hedging costs and benefits
- impacts the attractiveness of commodity indices
Interpreting Roll Yield
High positive roll yield indicates a market in backwardation, suggesting supply constraints or strong demand. Conversely, a high negative roll yield signals contango, often reflecting ample supply or weak demand. Monitoring roll yield helps investors gauge the cost-effectiveness of maintaining futures positions.
Roll Yield in Commodity Markets
Roll yield is significant in oil and agricultural markets, where futures contracts are frequently rolled over. For instance, in oil markets, a persistent backwardation can enhance returns for long positions, while contango can erode returns, making roll yield a critical factor in investment decisions.
