Essential Concept 89: Components of Futures Returns
The total return of a fully collateralized commodity futures contract is made up of:
Price return is produced by a change in spot prices.
Price return = (Current spot price – Previous spot price)/Previous spot price
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.
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.