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Basic Question 1 of 2
As a futures contract approaches maturity, a commodity will trade at higher and higher prices to finally meet the future spot price. This situation is called ______.
B. backwardation
A. contango
B. backwardation
User Contributed Comments 7
| User | Comment |
|---|---|
| jgraham6 | getting higher and higher until it meets the SPOT price. that is the key |
| vi2009 | tricky one ... ! |
| cong | Downward sloping futures curve means, the futures price decreaes as maturity increases (ie the futre price of near term is greater than that for far term). This describes a backwardation. |
| 8thlegend | Can u make money on commodities on backwardation or contango? |
| aravinda | If i understand correctly, the current future contract price is based on the assumption that future spot price of the commodity will be low due to a smaller demand in the future (you pay more for a fresh bunch of spinach rather than a 3 month old). And since the price on the future contract is lower than the current spot price of a commodity, as we go towards the maturity of the future contract, that future contract will appreciate in value to catch up to the Spot price of the commodity that would exist in future. |
| bundy | sell spot buy the future in backwardation |
| epfrndz | Isn't this backwardation? The highest price is the spot and the price (futures) continues to drop as you lengthen the maturity? |
Your review questions and global ranking system were so helpful.
Lina
Learning Outcome Statements
analyze the relationship between spot prices and expected future prices in markets in contango and markets in backwardation;
CFA® 2024 Level II Curriculum, Volume 5, Module 39.