Contango
A futures curve sloping up, with later delivery dearer than spot. Rolling a long position forward then costs money, whatever the commodity does.
Where you will meet it
Contango 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.”
- 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.”
- Show how volatility derivatives, including variance swaps, are used in practice
“The trap is carry: these futures usually sit in contango, so long hedges lose as they roll.”
- Explain roll return and its link to how the futures curve is shaped
“In contango the futures price exceeds the spot price and the position sells a cheap expiring contract to buy a more expensive further one, producing a negative roll return that erodes performance even if spot prices are flat.”
Practise it
Practise contango until it is automatic: questions that explain every wrong option.
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