Backwardation
A futures curve sloping down, with contracts for later delivery cheaper than the spot price. Rolling a long position forward then earns money.
Where you will meet it
Backwardation appears in 7 learning outcomes on the CFA syllabus. A few of them:
- Explain what drives the returns earned on a commodity futures position
“Roll return arises because a futures position must be rolled forward as contracts expire: it is positive in backwardation, where the futures price is below spot, and negative in contango, where it is above.”
- Explain carrying costs and how they shift the forward price
“Where benefits exceed financing and storage costs the forward price falls below spot, which is the condition usually called backwardation.”
- Analyse how spot and futures prices relate when markets are in contango and when they are in backwardation
“A futures curve is in contango when deferred futures prices sit above spot or near-dated prices, and in backwardation when they sit below.”
- Explain roll return and its link to how the futures curve is shaped
“In backwardation the relationship reverses and rolling adds to return.”
Practise it
Practise backwardation until it is automatic: questions that explain every wrong option.
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