What is the difference between backwardation and normal backwardation

It is a function of expectations, which is an average coming out of probabilistic outcomes. Here too, backwardation is also concerning a particular agreement on a specific date.

The June contract may be in a Backwardation, but the July Contract may not. The market is in backwardation if all the futures contracts with different expirations have prices higher than the spot price. One apparent reason is excessive demand or oversupply either for spot asset or futures, causing Contango or backwardation depending on the case. It looks like a Contango and an arbitrage play but because of the fear the equation turns around to become:. Thus, the equation governing the Futures Price with respect to the Spot Price is as follows when it is continuously compounded as is the convention.

A backwardation and a contango market must not be confused with an inverted futures curve and normal futures curve, respectively. When a market is facing backwardation, then the shape of the forward price curve is sloping downward, which indicates that the market is pretty inverted, whereas when a market is facing Contango, then the shape of the forward price The Forward Price A forward price is the agreed-upon future price at which a supplier will deliver an underlying financial asset or commodity to a customer.

It is entirely determined by the spot price of an underlying financial asset, which includes all carrying costs such as foregone costs, interest, and so on. This has been a guide to Contango vs Backwardation.

Here we discuss the top difference between Contango and Backwardation along with their meaning and comparative table. You can learn more from the following articles —. Very informative. Thanks for sharing this useful information. Your email address will not be published.

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No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc. Skip to primary navigation Skip to main content Skip to footer This blog covers common topics about contango and backwardation in the commodity markets.

Understanding Normal and Inverted Markets for Long Term Positions Recognizing when a commodity is in a normal contango or inverted backwardation market is critical when a market participant is considering entering into long-term position in a futures contract.

Markets in Backwardation Backwardation is infrequently seen in the commodity markets but sometimes does occur due to unexpected and disastrous events.

Over time, the increased production pushes down spot prices to converge with the end-of-year futures contracts. Trading Basic Education. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.

We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. What Is Backwardation? Key Takeaways Backwardation is when the current price of an underlying asset is higher than prices trading in the futures market. Backwardation can occur as a result of a higher demand for an asset currently than the contracts maturing in the coming months through the futures market.

Traders use backwardation to make a profit by selling short at the current price and buying at the lower futures price. Pros Backwardation can be beneficial to speculators and short-term traders wishing to gain from arbitrage. Cons Investors can lose money from backwardation if futures prices continue to move lower. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.

This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Contango: What It Takes Contango is a situation in which the futures price of a commodity is above the spot price.

What Is an Inverted Market? An inverted market occurs when the near-maturity futures contracts are higher in price than far-maturity futures contracts of the same type.

What Is Forwardation? Forwardation is a term used in the pricing of futures contracts and happens when the futures price of a commodity rises higher than the current price. What Is Convergence in Investing? Convergence is the movement of the price of a futures contract toward the spot price of the underlying cash commodity as the delivery date approaches.

Front Month Definition Front month, also called "near" or "spot" month, refers to the nearest expiration date for a futures or options contract. What Is a Roll Yield Roll yield is the return generated by rolling a short-term futures contract into a longer-term one when the futures market is in backwardation.