Estimating Futures Roll Yield from Prices of Two Expiries

Summary

The document shows how to estimate the roll yield implied by two CAC 40 futures contracts with different expiries. It compares the November and December contract prices, calculates their point difference, and expresses that difference as a percentage of the near contract’s price. The December contract is cheaper than November in the example, a backwardated curve associated in the answer with positive roll yield. Roll cost is defined as the negative of roll yield.

The calculation is a simple price comparison, rather than a full cost of carry model that decomposes financing, dividends, or other components. The answer notes that settlement prices may be preferable to bid and ask midpoints when the deferred contract has a wide spread and limited trading activity. The quoted observation is tied to a particular date and expiry schedule, so it does not establish a stable return or generalize to other markets or dates.

Key ideas

• Compare prices of two expiries to calculate the futures price spread in points.
• Express the spread as a percentage of the near contract price to estimate roll yield.
• Backwardation in the example corresponds to positive roll yield, while roll cost uses the opposite sign.
• Wide spreads and thin trading in the deferred contract can make midpoint comparisons unreliable.
• A single market snapshot does not establish a persistent return.

Tags

# Determining cost of carry for a future in Euronext.com


# Determining cost of carry for a future in Euronext.com












A snapshot from the trading book of the CAC 40 futures, on November 5 2018, is:

Using the book prices, how can I compute the cost of carry implicit in the November and December contracts?

Please consider that:

Last trading day: 16.00 Paris time. Third Friday in delivery month. In the event of the third Friday not being a business day, the Last Trading Day shall normally be the last business day preceding the third Friday.

## Answer by nbbo2 (score 4)

https://quant.stackexchange.com/a/42672

The market is in backwardation, so there is a positive roll yield.

December settled yesterday at 5083.0 vs November at 5098.5

That's a difference of 15.5 points (we could also compare the bid ask midpoints, that would give a difference of 14.5 points. I trust this number less because the bid ask spread for dec is very wide, december is not trading very actively yet, still 10 days to expiration on Nov 16, why did you choose November 5? Would have been better to wait a few more days).

So the roll yield in points is 15.5 points

The roll yield in percentage is 15.5/5098.5 = 0.304%

The "roll cost" is usually understood as the negative of the roll yield, so take the negative of the two numbers above.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.