Contango vs Backwardation

Contango vs Backwardation

Author: Manu Lakshmanan
Manu Lakshmanan
Manu Lakshmanan
Management Consulting | Strategy & Operations

Prior to accepting a position as the Director of Operations Strategy at DJO Global, Manu was a management consultant with McKinsey & Company in Houston. He served clients, including presenting directly to C-level executives, in digital, strategy, M&A, and operations projects.

Manu holds a PHD in Biomedical Engineering from Duke University and a BA in Physics from Cornell University.

Reviewed By: Adin Lykken
Adin Lykken
Adin Lykken
Consulting | Private Equity

Currently, Adin is an associate at Berkshire Partners, an $16B middle-market private equity fund. Prior to joining Berkshire Partners, Adin worked for just over three years at The Boston Consulting Group as an associate and consultant and previously interned for the Federal Reserve Board and the U.S. Senate.

Adin graduated from Yale University, Magna Cum Claude, with a Bachelor of Arts Degree in Economics.

Last Updated:April 21, 2022

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.

Contango is a trading term used to refer to a situation where the price of a future for a specific asset is higher than the expected spot price at the time of the expiration of the future. For example, if it is currently January 2012 and the price of a Sept12 gold future is $1800 but the expected price of gold in September 2012 is only $1700, there is contango.

As a result of contango, the future price is expected to tend to the estimated price at the time of expiration as the expiration date approaches. To use the example above, as it gets closer to September 2012 the gold future price will tend to $1700.

 

 

 

 

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