Understanding Contango and Backwardation – NinjaTrader Blog


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Contango and backwardation are terms used to describe the difference between the spot price and the forward price for a commodity. This defines the structure of the forward curve and shows the time on the horizontal axis and the delivery price of the goods on the vertical axis.

Watch the 2-minute video to learn more about contango and backwardation –

What is contango?

When a market is in contango, the forward price of a futures contract is higher than the spot price.

In the graphic below, the spot price is lower than the futures price, which created an upward sloping forward curve.

In contango, the futures contracts are traded with a premium at the spot price. Physically delivered futures contracts can be in contango due to fundamental factors such as storage, financing and insurance costs.

Futures prices can change over time if market participants change their views on the future expected spot price. As a result, the forward curve changes and can move from contango to backwardation.

What is backwardation?

When a market is in backwardation, the forward price of a futures contract is lower than the spot price.

In the graphic below, the spot price is higher than the futures price, which created a downward sloping forward or inverted curve.

Backward movement

The futures forward curve may show backwardation in physically delivered contracts, as owning the physical material can be beneficial, e.g. B. the maintenance of an ongoing production process. This is known as the convenience yield, which is an implicit return on inventory. The return on convenience is inversely proportional to the return on inventory. With high stocks, the convenience yield is low. Convenience yields are high when stocks are low.

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