- CFA Exams
- CFA Level I Exam
- Topic 8. Alternative Investments
- Learning Module 39. Introduction to Commodities and Commodity Derivatives
- Subject 5. Spot and Futures Pricing
CFA Practice Question
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
Correct Answer: A
Backwardation, on the other hand, is the situation where the future contract price is lower than the spot price for a commodity. It is characterized by a downward-sloping futures curve, which is referred as "backwardated."
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? |