Roll Forward
What Is Roll Forward?
Roll forward alludes to broadening the expiration or maturity of an option, futures contract, or forward by closing the initial contract and opening another longer-term contract for the equivalent underlying asset at the then-current market price. A roll forward empowers the trader to keep up with the position past the initial expiration of the contract, since options and futures contracts have finite expiration dates. It is normally carried out in no time before the expiration of the initial contract and expects that the gain or loss on the original contract be settled.
Nuts and bolts of Roll Forward
A roll forward incorporates two stages. To begin with, the initial contract is left. Then, another position with a later expiry is initiated. These two stages are typically executed all the while to reduce slippage or profit erosion due to a change in the price of the underlying asset.
The roll forward methodology changes for various financial instruments.
Options
A roll forward should be possible utilizing the equivalent strike price for the new contract as the bygone one, or another strike can be set. On the off chance that the new contract has a higher strike price than the initial contract, the strategy is called a "roll up," however assuming the new contract has a lower strike price, it is called a "roll down." These strategies might be utilized to safeguard profits or hedge against losses.
For instance, consider a trader who has a call option lapsing in June with a $10 strike price on Widget Company. The stock is trading at $12. As the call option approaches expiration, in the event that the trader remains bullish on Widget Company, they can decide to keep up with their investment position and safeguard profits by either selling the June call option or by at the same time buying a call option lapsing in September with a strike price of $12. This "roll up" to a higher strike price will reduce the premium paid for the subsequent choice (compared to buying a new $10 strike call), consequently protecting part of the profits from the principal trade.
Forwards
Forward foreign exchange contracts are generally rolled forward when the maturity date turns into the spot date. For instance, assuming an investor has bought euros versus the U.S. dollar at 1.0500 for value on June 30, the contract would be rolled on June 28 by going into a swap. Assuming the spot rate in the market is 1.1050, the investor would sell the very number of euros at that rate and receive the profit in dollars on June 30.
The euros would net to zero without any movement of funds. The investor would all the while go into another forward contract to buy similar amount of euros for the new forward value date; the rate would be a similar 1.1050 spot rate plus or minus the forward points to the new value date.
Futures
A futures position must be closed out either before the First Notice Day, on account of physically delivered contracts, or before the Last Trading Day, on account of cash-settled contracts. The contract is generally closed for cash, and the investor all the while goes into similar futures contract trade with a later expiry date.
For instance, on the off chance that a trader is long a crude oil future at $110 with a June expiry, they would close this trade before it lapses and afterward go into another crude oil contract at the current market rate that terminates sometime in the future.
Features
- Ordinarily involved derivatives in roll-forwards are options, futures contracts, and forwards.
- Roll forward alludes to the extension of a derivatives contract by closing out a soon-to-terminate contract and opening another at the current market price for a similar underlying asset with a future closing date.
