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FRM Part I · FRM Exam Part I · Commodity Forwards and Futures

A commodity futures curve is in backwardation. Which statement is most consistent with this shape?

Backwardation means futures prices are below the spot price, typically because the convenience yield from holding the physical commodity is high relative to interest and storage costs. A curve rising above spot due to storage costs describes contango instead.

  1. AFutures prices are below spot, often reflecting a high convenience yieldCorrect
  2. BFutures prices exceed spot because storage costs exceed the convenience yield
  3. CFutures prices equal spot because arbitrage eliminates carry
  4. DFutures prices are above spot because of a negative risk-free rate

Explanation

Backwardation means futures prices are lower than spot (or decline with maturity). In the cost-of-carry framework this occurs when the convenience yield is large relative to interest and storage costs. Option 2 describes contango.

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