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101 Concepts for the Level I Exam

Essential Concept 89: Components of Futures Returns

The total return of a fully collateralized commodity futures contract is made up of:

  1. Price return is produced by a change in spot prices.
    Price return = (Current spot price – Previous spot price)/Previous spot price
  2. Roll return is produced by closing expiring contracts and reestablishing the position in far-dated contracts.
    Roll return is sector dependent, it is positive when futures markets are in backwardation and negative when futures markets are in contango.
    Roll return can be significant for a single period but is a small percentage of total return over multiple periods.
    Gross roll return = (Near-term contract closing price – Farther-term contract closing price) / Near-term futures contract closing price.Net roll return = Gross roll return × Percentage of the position in the futures contract being rolled.
  3. Collateral return is the yield on securities that the investor deposits as collateral to establish the futures position.
    Collateral return = Risk free rate returnTotal return = price return + roll return + collateral return.

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