NISM Certifications · NISM-Series-XV: Research Analyst · Fundamental Analysis of Commodities
In commodity markets, the term 'contango' describes a situation where:
Contango is a market condition in which futures prices are above the spot price and later-dated contracts are priced higher than nearer ones. It mainly reflects the cost of carry such as storage, insurance and financing. The reverse condition is called backwardation.
- AFutures prices are higher than the spot price, with distant contracts priced above near contractsCorrect
- BFutures prices are lower than the spot price, with distant contracts priced below near contracts
- CSpot and futures prices are exactly equal at all maturities
- DFutures prices fall sharply on the expiry day
Explanation
Contango is an upward-sloping futures curve, where the futures price exceeds spot and deferred contracts cost more than near ones, reflecting cost of carry. The opposite situation, where futures trade below spot, is called backwardation.
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