Research and publications
The Tortoise versus the Hare: The Role of Term Structure versus Spot Price Trends in Determining Commodity Futures Returns
In the past, even if spot commodity prices declined, a commodity futures investor could still have a positive statistical expectation of profit, and that has been through the “roll yield” embedded in certain commodity futures contracts.When a near-month futures contract is trading at a premium to more distant contracts, we say that a commodity futures curve is in “backwardation.” Conversely, when a near-month contract is trading at a discount to more distant contracts, we say that the curve is in “contango.” When a commodity futures contract is in backwardation, an investor has two potential sources of returns. Since backwardation typically indicates scarcity, one is on the correct side of a potential price spike in the commodity by being long at that time. The other source of return involves a bit more explanation.
Author(s):
Hilary Till
Summary:
In the past, even if spot commodity prices declined, a commodity futures investor could still have a positive statistical expectation of profit, and that has been through the “roll yield” embedded in certain commodity futures contracts.When a near-month futures contract is trading at a premium to more distant contracts, we say that a commodity futures curve is in “backwardation.” Conversely, when a near-month contract is trading at a discount to more distant contracts, we say that the curve is in “contango.” When a commodity futures contract is in backwardation, an investor has two potential sources of returns. Since backwardation typically indicates scarcity, one is on the correct side of a potential price spike in the commodity by being long at that time. The other source of return involves a bit more explanation.
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Register/Log in| Type : | Working paper |
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| Date : | 01/09/2006 |
| Keywords : |
Commodities |
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