NISM Certifications · NISM-Series-VIII: Equity Derivatives · Introduction to Forwards and Futures
When the futures price is lower than the spot price of an index, the market situation is described as:
This situation is called backwardation. It occurs when the futures price is below the spot price, which can happen when expected dividends or convenience benefits exceed financing costs. Contango is the opposite, with futures priced above spot.
- AContango
- BBackwardationCorrect
- CFull carry
- DBasis premium
Explanation
Backwardation exists when futures trade below spot, giving a negative basis (spot minus futures positive). Contango is the normal situation of futures above spot. Full carry describes futures priced exactly at the cost-of-carry value.
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