Basis Normal Backwardation and Cantango

Contango

A market condition where futures prices are higher than the current spot price. This situation often arises when there are costs associated with holding the asset, such as storage and financing. Investors are willing to pay a premium for future delivery to avoid these carrying costs.

Example: If the spot price of oil is $50 per barrel, but the futures price for delivery in six months is $55 per barrel, the market is in contango.

Normal Backwardation

A market condition where futures prices are lower than the expected future spot prices. This scenario typically occurs when producers or holders of the commodity are willing to sell futures contracts at a discount to hedge against potential price declines, providing an incentive for speculators to take the opposite position.

Example: If the current spot price of wheat is $100 per bushel, but the futures price for delivery in six months is $95 per bushel, the market is in normal backwardation.

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