Contango

Question

Contango

Quizplus · Accepted Answer

Contango is the opposite of backwardation. It occurs when the futures price of a commodity is higher than the expected spot price at the time of delivery. This incentivizes suppliers to hold onto the commodity and sell it in the futures market for a higher price. However, according to the contango theory, the natural hedgers (i.e. purchasers of the commodity) should be the ones taking advantage of the lower spot price and buying the commodity, rather than the suppliers holding onto it for a higher price in the futures market. Therefore, both A and B are correct explanations of contango. However, the formula for contango is FO < PT, so only answer choices A and C are incorrect.