284
A Complete Guide to the Futures mArket
For the moment, ignore the last column in Table 18.1 and focus instead on the unadjusted con­
tinuous futures price (column 6). At the start of the period, the actual price and the unadjusted 
continuous futures price are identical. At the first rollover point, the forward contract (November 
2012) is trading at an 85
­cent discount to the nearby contract (July 2012). All subsequent prices of 
the November 2012 contract are then adjusted upward by this amount (the addition of a positive 
nearby/forward spread), yielding the unadjusted continuous futures prices shown in column 6. At 
the next rollover point, the forward contract (July 2013) is trading at an 86.25
­cent discount to the 
nearby contract (November 2012). As a result, all subsequent actual prices of the July 2013 contract 
must now be adjusted by the cumulative adjustment factor—the total of all rollover gaps up to that 
point (171.25 cents)—in order to avoid any artificial price gaps at the rollover point. This cumulative 
adjustment factor is indicated in column 5. The unadjusted continuous futures price is obtained by 
adding the cumulative adjustment factor to the actual price.
The preceding process is continued until the current date is reached. At this point, the final cumu­
lative adjustment factor is subtracted from all the unadjusted continuous futures prices (column 6), 
a step that sets the current price of the series equal to the price of the current contract (November 
2014 in our example) without changing the shape of the series. This continuous futures price is indi­
cated in column 7 of Table 18.1. Note that although actual prices seem to imply a net price decline of 
329.50 cents during the surveyed period, the continuous futures price indicates a 443
­cent increase—
the actual price change that would have been realized by a constant long futures position.
In effect, the construction of the continuous series can be thought of as the mathematical equiva­
lent of taking a nearest futures chart, cutting out each individual contract series contained in the 
chart, and pasting the ends together (assuming a continuous series employing all contracts and using 
the same rollover dates as the nearest futures chart).
In some markets, the spreads between nearby and forward contracts will range from premiums to 
discounts (e.g., cattle). However, in other markets, the spread differences will be unidirectional. For 
example, in the gold market, the forward month always trades at a premium to the nearby month.
2 In 
these types of markets, the spread­adjusted continuous price series can become increasingly disparate 
from actual prices.
It should be noted that when nearby premiums at contract rollovers tend to swamp nearby dis ­
counts, it is entirely possible for the series to eventually include negative prices for some past periods 
as cumulative adjustments mount, as illustrated in the soybean continuous futures chart in Figure 18.1. 
The price gain that would have been realized by a continuously held futures position during this period 
2 The reason for this behavioral pattern in gold spreads is related to the fact that world gold inventories exceed 
annual usage by many multiples, perhaps even by as much as a hundredfold. Consequently, there can never ac­
tually be a “shortage” of gold—and a shortage of nearby supplies is the only reason why a storable commodity 
would reflect a premium for the nearby contract. (Typically, for storable commodities, the fact that the forward 
contracts embed carrying costs will result in these contracts trading at a premium to more nearby months.) 
gold prices fluctuate in response to shifting perceptions of gold’s value among buyers and sellers. Even when 
gold prices are at extremely lofty levels, it does not imply any actual shortage, but rather an upward shift in the 
market’s perception of gold’s value. Supplies of virtually any level are still available—at some price. This is not 
true for most commodities, in which there is a definite relevant limit in total supplies.