Chartered Financial Analyst Level 2

Explanation

Backwardation occurs when futures prices are lower than spot prices, creating a downward-sloping forward curve.

Roll return in backwardation:

• For a long position, you sell the expiring contract at a higher price
• You buy the new contract at a lower price
• This creates a positive roll return because you're "selling high and buying low"

Contract adjustment in backwardation:

• Since you're rolling from more expensive contracts to cheaper contracts
• You need fewer contracts to maintain the same dollar exposure
• Cheaper contracts mean each contract represents less value, so you need more of them

Therefore, the correct answer is C: positive and the investor will need to buy fewer contracts to maintain the same exposure.