NISM Certifications · NISM-Series-XV: Research Analyst · Fundamental Analysis of Commodities
In commodity markets, the term 'contango' describes a situation in which:
Contango means futures prices exceed the spot price and rise with maturity, normally reflecting the cost of carry such as storage, insurance and financing. The opposite situation, where futures trade below spot, is called backwardation.
- AFutures prices are higher than the spot price, with longer-dated contracts costing moreCorrect
- BFutures prices are lower than the spot price, with longer-dated contracts costing less
- CSpot and futures prices are exactly equal at all maturities
- DFutures prices fall sharply on the expiry day only
Explanation
Contango is a market structure where the futures curve slopes upward, so deferred contracts trade above spot, typically reflecting cost of carry such as storage, insurance and interest. The second option describes backwardation. Equal prices at all maturities is not contango.
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