Answer: Losses due to the roll yield

## Explanation This question involves **stack-and-roll hedging** and **roll yield** concepts in commodity futures markets. ### Key Information: - Spot price: $106 - 1-month futures price: $102 - 12-month futures price: $98 - Market is in **contango** (futures prices are lower than spot price) - Spot price remains unchanged at $106 throughout the year ### Analysis: 1. **Market Structure**: The futures curve is in **contango** because: - Spot ($106) > 1-month futures ($102) > 12-month futures ($98) - This means longer-dated futures are trading at lower prices than shorter-dated ones 2. **Roll Yield in Contango**: - When the market is in contango, rolling futures positions forward typically results in **negative roll yield** - Each time the hedge is rolled, the producer must sell the expiring futures contract and buy a new one at a lower price - This creates losses as the futures position is "rolled down" the curve 3. **Stack-and-Roll Hedge Performance**: - The producer starts with futures contracts at $102 (1-month) - As contracts expire each month, they must be replaced with new contracts - Over the year, the futures position will gradually move from $102 down to $98 - This creates a loss of approximately $4 per barrel ($102 - $98) 4. **Net Result**: - The rolling process generates losses due to the negative roll yield - The producer effectively sells high and buys low repeatedly, but in this case, they're selling at progressively lower prices Therefore, the correct answer is **A. Losses due to the roll yield** because the contango market structure causes negative roll yield when rolling futures positions forward.

Author: LeetQuiz .