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Basic Question 1 of 2
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 ______.
B. backwardation
A. contango
B. backwardation
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? |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
compare theories of commodity futures returns;
describe, calculate, and interpret the components of total return for a fully collateralized commodity futures contract;
contrast roll return in markets in contango and markets in backwardation;
CFA® 2025 Level II Curriculum, Volume 5, Module 33.