What Is Backwardation?
Backwardation is a trading term used to refer to a situation where the price of a future for a specific asset is lower than the expected spot price at the time of expiration of the future. For example, if it is currently March 2012 and the price of a Dec12 oil future is $120 whereas the expected spot price for Dec12 is $125, there is backwardation.
As a result of backwardation, the future price will tend towards the estimated spot price at the time of expiration as the expiration date approaches. To use the example above, as it gets closer to December 2012 the oil future price will tend to $125.
Backwardation is the opposite of contango.
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