What it means
Rolling means closing or settling a position that is about to expire and replacing it with a similar one that runs further into the future. A company with a monthly futures hedge, a trader with a short-dated loan and a business with a revolving credit line all roll in this sense.
A straight roll keeps everything the same except the date. The appeal is simplicity and continuity.
A hedge that lasts as long as the exposure does, such as a fuel purchase that continues all year, can be maintained by rolling contracts that are shorter than the exposure. Roll decisions are therefore routine, and a straight roll is the default when nothing about the exposure has changed.
The costs are easy to overlook. Each roll can bring fees, a bid-ask spread, interest and sometimes a price difference between the old and new contract.
Added up over many rolls, these costs can be material even when each is small. There is also a risk that the roll hides a problem.
Rolling a loan that the borrower cannot repay, or a losing position that the trader hopes will recover, postpones the loss without removing it. Auditors, lenders and risk managers therefore watch for repeated rollovers and ask whether the original purpose is still being met.
Because the phrase is not standardised, it can also appear with other meanings in particular firms or markets. The sensible habit is to ask for the terms behind the label, namely what is being rolled, how often, at what cost and with whose approval.
The label is shorthand, and the numbers are what matter.
In practice
Real-world examples.
Example
An airline buys fuel futures every month to hedge its next quarter of fuel use. When each contract nears expiry, it sells the contract and buys a new one on the same quantity and terms. Treasury treats this as a straight roll because the exposure and the hedge ratio have not changed.
Example
A small manufacturer has a $300,000 bank overdraft that the bank renews every 90 days without changing the limit or pricing. The finance manager records each renewal in the cash plan. After two years, the bank asks for a plan to repay, because the loan has never reduced.
Example
A commodity trader holds a long position in copper and rolls it every month, paying a small fee each time. After a year, the trader reviews the position and finds that the cost of rolling has been $9,000. She decides to use a longer contract to cut the number of rolls.
Formula
Calculation
Total carrying cost of repeated rolls = principal x annual interest rate x (days per roll / 360) x number of rolls, plus fees per roll x number of rolls
A company rolls a $500,000 short-term loan every 30 days for six months on unchanged terms. The interest rate is 6% a year and each roll costs a $200 arrangement fee. Interest per roll = 500,000 x 0.06 x (30 / 360) = 30,000 x (30 / 360) = $2,500. Over 6 rolls, interest = 6 x 2,500 = $15,000 and fees = 6 x 200 = $1,200. Total cost = 15,000 + 1,200 = $16,200.Case study
Seen in the real world.
Windmere Foods is an illustrative, fictional importer that buys currency forward contracts to fix the cost of $2,400,000 of supplier payments each quarter. Rather than adapt the hedge to its shifting needs, the treasurer rolls the same contracts every quarter on the same amount.
When the company loses a major customer, its actual supplier payments fall to $1,500,000 a quarter, but the hedge stays at $2,400,000 for two more quarters. The excess hedge of $900,000 becomes a speculative position, and when the currency moves against the company, it records an unplanned loss.
The finance director introduces a quarterly review that compares the hedge to the latest forecast before every roll. The illustrative lesson is that a straight roll is convenient only while the underlying exposure remains the same.
Watch out
Common mistakes.
- Assuming the term has one fixed meaning, when it is informal and should be confirmed with the person using it.
- Rolling automatically without checking that the original exposure still exists, which can turn a hedge into a speculation.
- Ignoring the accumulated cost of repeated rolls, when fees and spreads add up over time.
Questions
People also ask.
What does it mean to roll a position?
It means closing or settling a position that is about to expire and opening a similar one with a later date, so exposure continues.
Is rolling the same as refinancing?
Not exactly, because a roll normally keeps the same terms while refinancing usually replaces the loan with a new one on different terms.
Why do auditors care about repeated rolls?
Repeated rollovers can postpone the recognition of a loss or hide a borrower's inability to repay, so they ask whether the purpose and the value are still sound.
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