When rolling over positions in different futures contracts of the same underlying asset, compensating result adjustments are applied to eliminate the impact of price differences between the contracts.
These adjustments, commonly referred to as "rollover adjustments," are added or subtracted from the position's result. Their purpose is to maintain the same overall result for the position after the rollover, regardless of the price disparity between the current and next futures contracts.
Here's a detailed example:
You hold a `BUY` position of 100 quantity of Oil futures with an average price of $50.
Oil futures rates at the time of rollover are:
- Current contract buy price = $50.50
- Current contract sell price = $50.45
- New contract buy price = $52.50
- New contract sell price = $52.45
The price differences of the contracts, in general, are calculated as follows:
Sell price difference = (New contract sell price) - (Current contract sell price) = $52.45 - $50.45 = $2
Buy price difference = (New contract buy price) - (Current contract buy price) = $52.50 - $50.50 = $2
We can now calculate the Result Adjustments of individual positions:
BUY position result adjustment = - [(Quantity) * (Sell price difference)]
SELL position result adjustment. = [(Quantity) * (Buy price difference)]
Given that the position you hold in this example is a `BUY` position of 100 quantity, we will use the first formula to calculate its adjustment:
BUY position result adjustment = - [(Quantity) * (Sell price difference)] = - (100 * $2) = - $200
To double-check that the Result adjustment of the position after the rollover is correct, we will calculate its result before the rollover and after the rollover without taking into account the adjustment of the result:
Before the rollover: Quantity * (Current contract sell price - Average price) = 100 * (50.45 - 50) = $45
After the rollover: Quantity * (New contract sell price - Average price) = 100 * (52.45 - 50) = $245
We can see that the difference is exactly $245 - $45 = $200, so we can confirm that the Result adjustment of - $200 of the position due to the rollover is correct ✅.