Saturday, July 21, 2007 The English come up with all sorts of
funny terms, and of course we have to learn them, for we have
adopted most of their financial machinations (e.g., stock
market). Contango and backwardation theory deal with spot and
futures prices of commodities. For example, contango refers to
the spot price of a commodity (say oil) being less than the
futures's price; backwardation is the opposite: the spot price
is greater than the futures's price. The reasons for the spot
price being higher or lower than the futures vary: different
aspects come into play such as carrying cost and convenience
yield (fancy words to talk about inventory cost and a bit of
profit premium for you having the actual commodity). These are
not your everyday concepts, but are useful nonetheless--
arguably, only useful to finance geeks or investment managers.
For a more or less in-depth definition, visit Econbrowser