Roll yield
Also written Roll-over yield
The gain or loss from rolling an expiring futures position into the next contract month, over and above the pure cost of carry.
In plain language
An index fund holding commodity futures cannot hold one contract forever — it expires. So the fund sells the contract that is about to expire and buys the next one, over and over, for as long as it runs.
Every one of these rolls is itself a small trade, and it can make or lose money on its own, separate from whatever the underlying commodity price does. Roll yield is the name for that extra gain or loss.
How it works
Chapter 2's worked illustration starts with the carry cost parity: the futures price should reflect spot plus the cost of carrying the commodity to expiry. In its Bullion Index Futures example, carry cost is Rs 50 per contract, but the fund must roll from a near-month contract at Rs 16,000 to a next-month contract at Rs 16,100 — a roll cost of Rs 100 per contract, which is Rs 50 more than the pure carry cost.
If, after the roll, the next-month contract price rises further — say from Rs 16,100 to Rs 16,150 — the position gains an extra Rs 50 per contract on top. Whether the net effect is a gain or a loss for the roll depends on how the carrying-cost gap compares with how the new contract actually moves after the roll, which is why persistent contango is a drag on a long index position while persistent backwardation can add to its return.
A worked example
An index fund holds 100 contracts of Bullion Index Futures at the near-month price of Rs 16,000, with one month's carry cost estimated at Rs 50 per contract.
It rolls: sells 100 contracts at Rs 16,000 and buys 100 contracts of the next month at Rs 16,100.
Roll cost = (Rs 16,100 - Rs 16,000) x 100 contracts = Rs 10,000
If the new near-month contract later moves from Rs 16,100 to Rs 16,150 as contango persists, the position gains Rs 50 x 100 = Rs 5,000 from that continuation. The fund paid Rs 10,000 to roll but recovered only Rs 5,000 of that through the subsequent price move — a net roll drag of Rs 5,000 on this cycle, which is exactly why an index can underperform a flat spot market when it keeps rolling into a contango curve.
Why NISM asks about it
Chapter 2 (Commodity Indices), in the discussion of index roll-over and its uses, with the roll mechanics also referenced from Chapter 3's treatment of contango. Expect a calculation linking the roll cost to the carry cost, and a conceptual question on why persistent contango produces negative roll yield for a long-only commodity index.
Common exam traps
- Roll yield is not the same as the underlying commodity's spot return. An index can show a poor roll yield even while spot prices are flat or rising.
- Contango generally hurts a long roller; backwardation generally helps one — because contango means buying the new month at a premium each cycle.
- The roll cost and the subsequent price move are two separate numbers — do not net them together before checking what the question is actually asking for.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Cost of carryThe cost of holding an asset until a future date — financing interest plus storage, less any income it pays. It links spot to futures: fair futures price = spot + cost of carry − inflows.
- BackwardationA market in which the futures price sits below the spot price — the cost of carry says futures should be dearer, and something is overriding it.
- ContangoA market in which the futures price sits above the spot price, normally because the futures buyer is paying for the cost of carrying the commodity through to delivery.
- Excess return indexAn index measuring an investment's performance purely against a benchmark or risk-free rate, without counting any income the underlying generates — the flip side of a total return index, which counts both.
- Sectoral indexA commodity index built from the futures of a single segment — bullion, base metals, energy or the guar family — with fixed annual weights and no 30 per cent cap per constituent.
- Roll downAn active fixed income strategy that profits from the passage of time: on an upward-sloping yield curve a bond's remaining maturity shortens, its yield falls, and its price rises.
- Price-based indexAn index whose constituent weights stay fixed for the year, so the level moves only when prices move — how every Indian commodity index works, as against volume-based equity indices.