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Consider two positions.

  1. Buy a 1Y future on SPX index.
  2. Buy one 6M SPX future today, and roll it into another 6M future after the first one expires. Assume the 6 month funding rate is static across time, and the profit after 6 months is put into a bank account so it earns the funding rate.

My question is purely intuitively, why would these two approaches give different returns, and when is one preferred over the other?

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All else being equal, you should be indifferent. However by choosing to roll at 6m instead of buying the 1 year contract, you expose yourself to interest rate risk if the interest rate curve shifts between the 6m and 1y mark.

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  • $\begingroup$ Let's say the 6M funding rate is really low (say, 1%) and the 12M funding rate is really high (say, 10%). Isn't it better to go with the 2nd approach then? By going with 2x6M, my futures price will only go up by 1% each time. If I go with the 1Y approach, my future price scales with 10%?. $\endgroup$
    – HeadTfewn
    Commented Oct 3 at 19:51
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    $\begingroup$ No. In this scenario, that would mean that between 6m and 12m, the interest rate is expected to increase significantly (to approx 9.45%). When you go to roll after the 6m period, if nothing has changed, you will find that the cost of rolling should be around 4.6%. $\endgroup$
    – Rowan Harley
    Commented Oct 3 at 19:57
  • $\begingroup$ if nothing has changed, the 6M funding rate 6 months from now should be equal to the 6M funding rate today, i.e. 1% in both cases. $\endgroup$
    – HeadTfewn
    Commented Oct 3 at 20:46

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