Rollover cost

In the example of Mumbai housing market the contract was valid for a period of 6 months. However in case of futures contracts traded on national stock exchange, the contracts are available in 1 month, 2 month and 3 month time frame. The time frame up to which the contract lasts is called ‘The expiry’ of the contract. 

Suppose Sita wants to enter into a 6 month contract with Noor on the stock exchange she will have to buy a futures contract with 3 months validity and then at expiry again buy a 3 month contract. This is called rolling over the position. It refers to carrying forward a particular periods future contract position to the next month. This can be done by selling the contract which is about to expire and buying the new longer contract

Suppose investor X is bullish about Nifty futures, when his current month contract is due for expiry he will exit the position and buy the subsequent month’s contract rolling over his position. 

Rollover cost is calculated as the percentage change between futures contract price for the next month and the futures contract price for the current month contract. For example let’s assume X holds 10 futures contract of Ashok Leyland that is expected to expire at the end of this month. Price of each contract is Rs.94.35. He decides to roll over his position. Price of each contract for next month expiry is Rs.95.45 and he needs to buy 10 contracts to carry forward his position. 

Rollover cost = ((95.45 / 94.35) -1 )*100 = 1.2%

It means he will get 10 * 94.35 = 943.5 by selling the current month contract, but when he buys the 10 lots of next month contract he will pay 10* 95.45 = 954.5. Thus he will pay an additional cost of 954.5 – 943.5 = 11 which is 1.2% of his current investment ie. 943.5.