Normal backwardation
A) maintains that, for most commodities, there are natural hedgers who desire to shed risk.
B) maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price.
C) assumes that risk premiums in the futures markets are based on systematic risk.
D) maintains that, for most commodities, there are natural hedgers who desire to shed risk, and that speculators will enter the long side of the contract only if the futures price is below the expected spot price.
E) maintains that speculators will enter the long side of the contract only if the futures price is below the expected spot price and assumes that risk premiums in the futures markets are based on systematic risk.

Question

Quizplus · Accepted Answer

Normal backwardation theory, as proposed by John Maynard Keynes, suggests that futures prices tend to be below the expected future spot prices. This is because hedgers, who are typically producers or consumers of the commodity, are willing to pay a premium to offload their risk onto speculators. Thus, for most commodities, there are natural hedgers who wish to shed risk, and speculators will enter the long side of the futures contract only if they expect to profit from an increase in prices, i.e., if the futures price is below the expected spot price at contract maturity. This explanation combines elements from both A and B, making D the correct choice.

Normal Backwardation