Contango and backwardation

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Information about Contango and backwardation
Business & Mgmt

Published on February 26, 2014

Author: corporatebridge

Source: slideshare.net

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Lifesaving Concepts Commodity Market Future contract Commodity Future price Premium Spot Price Derivative

In certain energy and commodity markets contango and backwardation terms are used. If we get more into deep into it; we can say that especially in the crude oil market these terms are used. In many books you can see only theoretical definitions but in practical that concept is much different. There are two concepts of contengo• • Contengo Normal Contengo

Contango refers to the situation where the Future prices of stock are higher than the current spot price.

It refers to phenomena where Future price is higher than expected Future spot price (Expected market Price) in the market.

If you understand contengo by heart then you can easily predict the meaning of backwardation. Simply it is opposite to contengo. Backwardation can occur if the markets have oversupply of commodities. Backwardation is bearish indicator it also indicate an immediate shortage. There are two concepts of backwardation • • Backwardation Normal Backwardation

Backwardation Definition It refers to the market situation where the Future prices are lower than the current spot prices for a particular commodity.

Normal Backwardation It refers to phenomena where Future price is less than expected future spot price (Expected market Price) in the market.

Difference between Contango and Backwardation Basis Definition Contango Contango refers to the situation where the Future prices of stock are higher than the current spot price Future Curve Price Difference Most Happen in Case of Upward Sloping Future Price > Spot Price Commodity Backwardation It refers to the market situation where the Future prices are lower than the current spot prices for a particular commodity. Downward Sloping Future Price < Spot Price Oil

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