What does Roll Yield mean?
The yield on rolling from a front month futures contract to next month maturing contracts. The roll yield is the yield that a futures investor gets when his futures contract converges to the spot price and position is rolled over to next maturing futures contract.
Futures Knowledge Explains Roll Yield
In rolling hedge, though the underlying contract is expiring, the trader still wants to keep the hedge in place. So the existing position is sold in the contact that will mature soon and an equivalent position is bought in a contract for the future month. This may result in gain or loss depending on whether the futures curve is in backwardation or contango.
In backwardation, the front-month contract is priced higher than the next maturing contract So the investor will earn a positive roll yield by selling the front-month contract and buying equivalent the next month contract. But in contango, the front-month contract is priced lower than the next maturing contract and the investor will have a negative roll yield.
