CFA Level I · CFA Level I Exam · Natural Resources
A commodity futures curve is in backwardation. Which of the following is the most likely explanation?
Backwardation most likely arises when the convenience yield of holding the physical commodity exceeds financing and storage costs. This makes the futures price lower than the spot price. High storage costs relative to interest would instead produce contango, an upward-sloping futures curve.
- AStorage costs are high relative to the interest rate
- BThe convenience yield exceeds the cost of carrying the commodityCorrect
- CProducers expect spot prices to fall
Explanation
Under the cost-of-carry framework, futures price is approximately spot x (1 + r + storage - convenience yield). Backwardation occurs when the convenience yield exceeds financing and storage costs, so the futures price is below spot. High storage costs push toward contango.
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