ROLLO - Futures Roll/Switch
What is
When Futures near their expiry date, it may be necessary to square off this position and roll it into the next deliverable month.
There are 3 levels at which the ROLLO may be executed:
Level 1 - Company wide
This is straight forward to apply manually; whatever the net position in the off the board month is squared by executing the reverse sign deal in that month at the closing price and opening the position in the next month at its current price.
E.g. If there is a position of 25 long in NY11 October 2002, the current market price for October 2002 is 7.1 and the current market price for March 2003 is 7.25
The roll is achieved by selling 25 lots of NY11 October 2002 @7.1 and buying 25 lots of NY11 March 2003 @7.25. So October is now square and may be settled and the position is maintained in March.
Level 2 – By department
If the company organizes its business by profit centre whereby each profit centre is a department, each department has its own position so each department’s position must be rolled. This is achieved in the same way as the company wide roll i.e. manually with a pair of trades per department. These are known as book rolls.
Level 3 – By contract
In companies which predominately trade physical commodities, futures are used to hedge the physical positions and the futures trades are included in the P&L of the contract. If the company requires the futures rolls to be part of the contract P&L, the roll must be actioned at contract level. The ROLLO menu option helps to achieve this
When looking at the roll for a contract, the physical allocations must be considered i.e. the net position of a physical and its allocation is what needs to be rolled. The futures are usually assigned to the contract header (suffix 000). In practice a physical is often split to allocate so that the futures may be assigned to suffix 000, but suffix 001 is allocated. So to work out the position to be rolled the futures are notionally split and assigned to all contract parts on a pro-rata basis of the quantities and the roll actioned at contract split level.
The program runs by analyzing the futures trades for the selected month and commodity.
The ROLLO report has 4 sections.
Switch Trades
This includes futures which do not have a physical assignment. The trades are organised by Account. The special account ROLLO.T reports individual trades, other accounts show the net position. The net position for each account is suggested as the roll.
Allocated Physicals
This includes notionally split futures which are notionally assigned to allocated physicals. The allocated pair are presented on the same line with their respective futures positions. If one side does not have any trades in the roll month, its furthest forward futures position is shown instead with the month. The suggested roll is the net position over both sides in the roll month. If its square, the line is not normally reported (if required it may be reported by selection).
Unallocated Physicals
This includes notionally split futures which are notionally assigned to unallocated physicals. The suggested roll is the net position of the split.
EU Licenses
This includes futures which are assigned to Licenses. The trades are organised by License reference. The net position for each license is suggested as the roll.
After viewing the report the user has the option of creating the rolling futures trades.
The suggested rolls (as above) are presented in a fully editable grid.
The program creates both the closing trades in the month being rolled and the rolling trades in the roll to month.
Notes
a) Physical contracts are excluded from the roll if they are allocated and their ‘Rollo Month’ is different to that being rolled. This is to handle the situation where the purchase and sale taken individually are not square in the roll month, but taken together they are. So by leaving the roll month as the month they are square, the pair do not appear in subsequent reports.
b) The TRADE/Rollo month is updated only for those contracts which are rolled. Those on the report but are not rolled, do not have their Rollo month updated.