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Alan
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Commodity futures language (backwardation/contango)

November 8th, 2013, 7:17 pm

I thought I understood contango and backwardation, but wikipedia has confused me.Is backwardation, for example, the case where:1. The futures price is lower than the spot?, or2. The futures price is lower than the expected spot (where 'expected' means in some some 'objective/historical/actuarial' sense)? These are clearly different notions. Take VIX, for example, in very stressed markets. We would expect 1 to hold, but not necessarily 2.Presumably the same could be said for many markets.
 
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tagoma
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Commodity futures language (backwardation/contango)

November 8th, 2013, 7:33 pm

agreed! there are so many websites where the definitions of contago/backwardation are confusing!the answer is (1), or more precisely when some 'longer' maturity is lower than a 'shorter' one.it is "as it actually is".
Last edited by tagoma on November 7th, 2013, 11:00 pm, edited 1 time in total.
 
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acastaldo
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Commodity futures language (backwardation/contango)

November 8th, 2013, 7:34 pm

the standard definition is 1.unfortunately Keynes used the term in the sense 2. Perhaps we should call that "Keynesian backwardation" to avoid confusion with 1.
Last edited by acastaldo on November 10th, 2013, 11:00 pm, edited 1 time in total.
 
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daveangel
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Commodity futures language (backwardation/contango)

November 8th, 2013, 9:37 pm

I believe that the Keynesian definition is more correct. Keynes proposed his theory of backwardation in the context of getting speculators to go long the commodity for forward delivery. The only way the reason why a speculator would be enticed into such a position is if in aggregate speculators can buy the commodity for forward delivery with the expectation of being able to make a profit when the delivery takes place.
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Alan
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Commodity futures language (backwardation/contango)

November 8th, 2013, 9:56 pm

Thanks guys -- very helpful. I will then stick with 1 for describing VIX futures, as itis standard and clear and also the Keynesian argument doesn't seem to apply.
 
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chocolatemoney
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Commodity futures language (backwardation/contango)

December 14th, 2013, 9:08 am

QuoteOriginally posted by: AlanI thought I understood contango and backwardation, but wikipedia has confused me.Is backwardation, for example, the case where:1. The futures price is lower than the spot?, or2. The futures price is lower than the expected spot (where 'expected' means in some some 'objective/historical/actuarial' sense)? These are clearly different notions. Take VIX, for example, in very stressed markets. We would expect 1 to hold, but not necessarily 2.Presumably the same could be said for many markets.In some circles, they speak about normal backwardation (2) and backwardation. Not sure how well spread this convention his.
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