Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Backwardation”
When a commodity is valued more highly in a spot market that is, when it is for delivery today than in a futures market for delivery at some point in the future. Normally, interest costs mean that futures prices are higher than spot prices, unless the markets expect the price of the commodity to fall over time, perhaps because there is a temporary bottleneck in supply. When spot prices are lower than futures price it is known as contango.
Backwardation is a theory developed in respect to the price of a futures contract and the contract's time to expire. Backwardation says that as the contract approaches expiration, the futures contract will trade at a higher price compared to when the contract was further away from expiration. This is said to occur due to the convenience yield being higher than the prevailing risk free rate.

By Barry Norman, Investors Trading Academy - ITA

свернуть