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A contango market is also known as a normal market or carrying-cost market. The opposite market condition to contango is known as backwardation. "A market is 'in backwardation' when the futures price is below the expected spot price for a particular commodity.
The opposite market condition to normal backwardation is known as contango. Contango refers to "negative basis" where the future price is trading above the expected spot price. [3] Note: In industry parlance backwardation may refer to the situation that futures prices are below the current spot price. [4]
As both parties risk their counter-party reneging if the price goes against them, the contract may involve both parties lodging as security a margin of the value of the contract with a mutually trusted third party. For example, in gold futures trading, the margin varies between 2% and 20% depending on the volatility of the spot market. [2]
Futures prices tend to be in contango; The volatility of spot and futures prices tend to be low, and futures premiums rise to the full cost of storage; When supplies are tight, and purchasing managers build production inventory levels to ensure availability, Futures prices tend toward backwardation
A convenience yield is an implied return on holding inventories. [1] [2] It is an adjustment to the cost of carry in the non-arbitrage pricing formula for forward prices in markets with trading constraints.
Exchange-traded funds are some of the most useful investments ever created. But they can also be more complicated than you realize, and if you don't understand all the intricacies involved in a ...
The oil-storage trade, also referred to as contango, is a market strategy in which large, often vertically-integrated oil companies purchase oil for immediate delivery and storage—when the price of oil is low— and hold it in storage until the price of oil increases. [1]
The forward curve is a function graph in finance that defines the prices at which a contract for future delivery or payment can be concluded today. For example, a futures contract forward curve is prices being plotted as a function of the amount of time between now and the expiry date of the futures contract (with the spot price being the price at time zero).