Chartered Financial Analyst Level 2
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20 To maintain the same exposure in the futures markets when in contango, rolling forward the expiring futures contracts requires buying:
Exam-Like
A
a lower number of futures contracts.
B
the same number of futures contracts.
C
a higher number of futures contracts.
Explanation:
Explanation
When a futures market is in contango, the forward curve is upward sloping, meaning longer-dated futures contracts trade at higher prices than shorter-dated contracts.
Key concept: In contango, when rolling forward expiring contracts, you need to buy more contracts to maintain the same dollar exposure because:
- You're selling the expiring (cheaper) contracts
- You're buying the new (more expensive) contracts
- Since the new contracts are more expensive, you need more of them to maintain the same total dollar value exposure
Therefore, the correct answer is C: a higher number of futures contracts.
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