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Contango is a situation in which the futures price (or forward price) of a commodity is higher than the expected spot price of the contract at maturity. [1] In a contango situation, arbitrageurs or speculators are "willing to pay more [now] for a commodity [to be received] at some point in the future than the actual expected price of the ...
Futures prices tend to be in contango; The volatility of spot and futures prices tend to be low, and futures premiums rise to the full cost of storage; When supplies are tight, and purchasing managers build production inventory levels to ensure availability, Futures prices tend toward backwardation
The concept started to be used by oil traders in the market in early 1990. [2] But it was in 2007 through 2009 that the oil storage trade expanded. [6] Many participants—including Wall Street giants, such as Morgan Stanley, Goldman Sachs, and Citicorp—turned sizeable profits simply by sitting on tanks of oil. [5]
The cost of carry or carrying charge is the cost of holding a security or a physical commodity over a period of time. The carrying charge includes insurance, storage and interest on the invested funds as well as other incidental costs.
The roll yield is the difference between the profit or loss of a futures contract and the change in the spot price of the underlying asset of that futures contract. Unlike fixed income or dividend yields, a roll yield does not provide a cash payment, and may not be counted as a profit in certain cases if it accounts for the underlying asset's cost-of-carry.
The forward price (or sometimes forward rate) is the agreed upon price of an asset in a forward contract. [1] [2] Using the rational pricing assumption, for a forward contract on an underlying asset that is tradeable, the forward price can be expressed in terms of the spot price and any dividends.
In finance, the time value (TV) (extrinsic or instrumental value) of an option is the premium a rational investor would pay over its current exercise value (intrinsic value), based on the probability it will increase in value before expiry.
A commodity price index is a fixed-weight index or (weighted) average of selected commodity prices, which may be based on spot or futures prices.It is designed to be representative of the broad commodity asset class or a specific subset of commodities, such as energy or metals.