Tired by searching

meaning of

contango and

backwardation

over the internet?

Confused in understanding concept of contango and backwardation by referring innumerable websites over the web? But the question still remains, How to understand contango and backwardation in simple language?

Confused in understanding concept of

contango and backwardation by

referring innumerable websites over the

web?

But the question still remains, How

to understand contango and

backwardation in simple language

Don’t worry! This presentation gives you a gist of contango and backwardation

Lifesaving Concepts

Commodity

Market

Commodity

Derivative

Future

contract

Spot

Price

Premium

Future

price

In certain energy and commodity markets contango and

backwardation terms are used. If we get more into deep

into it; we can say that especially in the crude oil market

these terms are used. In many books you can see only

theoretical definitions but in practical that concept is

much different.

There are two concepts of contengo-

• Contengo

• Normal Contengo

Contango refers to the situation

where the Future prices of

stock are higher than the

current spot price.

It refers to phenomena where

Future price is higher than

expected Future spot price

(Expected market Price) in the

market.

If you understand contengo by heart then you can easily predict the meaning of backwardation. Simply it is opposite to contengo. Backwardation can occur if the markets have oversupply of commodities. Backwardation is bearish indicator it also indicate an immediate shortage.

There are two concepts of backwardation

• Backwardation

• Normal Backwardation

Backwardation Definition

It refers to the market situation where the Future prices are lower than the current spot prices for a

particular commodity.

Normal Backwardation

It refers to phenomena where Future price is less than expected

future spot price (Expected market Price) in the market.

Difference between Contango and Backwardation

Basis Contango Backwardation

Definition Contango refers to the situation

where the Future prices of stock

are higher than the current spot

price

It refers to the market

situation where the

Future prices are lower

than the current spot

prices for a particular

commodity.

Future Curve Upward Sloping Downward Sloping

Price Difference Future Price > Spot Price Future Price < Spot Price

Most Happen in

Case of

Commodity

Oil

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