CFA Practice Question

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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 ______.

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?
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