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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 opposite market condition to normal backwardation is known as contango. Contango refers to "negative basis" where the future price is trading above the expected spot price. [3] Note: In industry parlance backwardation may refer to the situation that futures prices are below the current spot price. [4]
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.
[1] [2] It is an adjustment to the cost of carry in the non-arbitrage pricing formula for forward prices in markets with trading constraints. Let F t , T {\displaystyle F_{t,T}} be the forward price of an asset with initial price S t {\displaystyle S_{t}} and maturity T {\displaystyle T} .
In finance, a forward contract, or simply a forward, is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on in the contract, making it a type of derivative instrument.
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.