What determines roll yield?

• A. Current spot price
• B. Current futures price minus previous futures price
• C. Market demand
• D. Historical price averages

Answer: (B)

Roll yield is primarily determined by the difference in price between the current futures contract and the previous futures contract, reflecting how futures prices change over time as they approach expiration. When futures contracts are rolled over (i.e., replaced with a new contract with a later expiration date), if the price of the new contract is higher than the old contract, it results in a negative roll yield. Conversely, if the new contract is lower, it leads to a positive roll yield. This mechanism is crucial in commodities trading and is influenced by market conditions, including supply and demand dynamics.

The concept captures the behavior of futures prices in relation to the spot price and is intrinsic to understanding the performance of a commodity over time. Hence, the correct determination of roll yield directly involves the future price shifts in relation to their preceding values, making the second option the most appropriate choice.