CFA Level I · CFA Level I Exam · Natural Resources
A futures curve for a commodity is upward sloping, with longer-dated contracts priced above the spot price. This shape is best described as:
The shape is contango. Contango occurs when futures prices are above the spot price, producing an upward sloping curve, usually because storage and financing costs exceed the convenience yield. Backwardation is the opposite, with futures prices below spot.
- Abackwardation.
- Bcontango.Correct
- Ca positive convenience yield.
Explanation
Contango is when futures prices exceed the spot price, giving an upward sloping curve, typically when storage and financing costs outweigh the convenience yield. Backwardation is the reverse, with futures below spot.
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