How is the magnitude of roll yield calculated?

The magnitude of roll yield is calculated as the absolute difference between the forward price and the spot price, divided by the spot price. This formula captures how the investment is expected to gain or lose value as it approaches maturity, based on the difference between these two prices.

In the context of futures contracts or forward contracts, the forward price is what the market anticipates a commodity will be worth at a future date, while the spot price is the current market price. If the forward price is greater than the spot price, an investor can expect a positive roll yield as the price converges toward the spot price as the contract approaches expiration. This yield reflects the cost of carry and variations in market expectations and can be particularly relevant in commodities.

Calculating the roll yield using the absolute value ensures that you are looking at the magnitude of the yield irrespective of whether it is positive or negative, providing a clear perspective on how much roll yield is generated or lost. Using the spot price as the denominator allows you to express the roll yield as a percentage, making it easier to assess relative performance.

The other options provided involve different mathematical expressions that do not correctly capture the essence of roll yield calculation as required by the CFA curriculum, focusing instead on either non-standard calculations or