The previous issue of ideas explained contango and backwardation – the market situations that represent certain price constellations for futures contracts. These constellations also play an important role in the rolling process, which is described in detail later in the text.
What is a rolling process and why is it needed?
This question often concerns investors who are invested in raw material certificates with an unlimited term. As mentioned in the previous issue, every future contract (regardless of the underlying asset) has a term. For example, if an investor purchases a turbo call warrant on Brent oil, the issuer would purchase a corresponding number of Brent futures contracts on the futures exchange as a hedging transaction (or take a long position in the futures). The issuer usually purchases the future contract with the shortest term (even if the certificate runs indefinitely) because it is the most liquid. Liquidity on the futures exchange is measured by the “open interest” – number of contracts in circulation. Before the future matures, it must be exchanged for a future with a longer term. This “future exchange” is called a rolling process (also called a “roll-over date” or simply “roll”). Even if Société Générale, as the issuer, has the opportunity to roll the future position 40 days before the expiration date (the last trading day), it usually does this in the week before the expiration date. The position is generally replaced by the next due future contract, although it can also be rolled into a future contract with a later maturity.