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Answer: Losses due to the roll yield
**Explanation:** In a stack-and-roll hedge, the oil producer is selling futures contracts to hedge their production. The futures curve is in **contango** (futures prices are lower than spot price and decline with maturity). - Spot price: $106 - 1-month futures: $102 - 12-month futures: $98 When rolling the hedge forward each month, the producer will be selling futures at progressively lower prices. This creates **negative roll yield** - the producer loses money on the futures position as they roll from higher-priced contracts to lower-priced contracts. Since the spot price remains unchanged at $106, the losses come purely from the roll yield in the contango market structure.
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$106, the one-month futures price is $102 and the 12-month futures price is $98. If the spot price and the oil futures curve do not shift at all during the entire one-year period, while the oil producer employs the stack-and-roll hedge (e.g., at the end of the one year, the spot price is unchanged at $106), what will be the net performance of rolling the hedge forward without regard to the underlying future sale of spot oil (ignoring transaction costs)?A. Losses due to the roll yield
B. Approximately breakeven (no gain or loss)
C. Gains due to the roll yield
D. Not enough information
A
Losses due to the roll yield
B
Approximately breakeven (no gain or loss)
C
Gains due to the roll yield
D
Not enough information
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