Is there a difference between contango and “normal contango” Not sure how the last response to this question is wrong and I generally thought futures curves did not imply much of anything about expected future spot prices but rather current supply/demand dynamics and cost of carry, etc
Which of the following best describes a normal contango environment?
A
The expected future spot price is less than the futures price.
B
The spot price is greater than the futures price.
C
The expected future spot price is greater than the futures price.
Not everyone agrees on the definitions (much as not everyone agrees on the definition of roll return), but here’s what I’ve learned from the CFA curriculum:
Contango means that the futures price is above today’s spot price
Normal contango means that the futures price is above the expected spot price (at the expiration of the futures contract)
Backwardation means that the futures price is below today’s spot price
Normal backwardation means that the futures price is below the expected spot price (at the expiration of the futures contract)
“Expected” is the Keyword you need to look for before Spot Price. Remember, the word “Normal” here is confusing because both Normal Contango and Normal Backwardation are not observable and just theoretical concepts. However, Contango and Backwardation are observable.
I think the key word they are looking for is “expected”.
To summarize the concept as posited in the text: Backwardation & contango describe situations in which forward prices do not equal spot prices. Normal backwardation & normal contango describe situations in which forward prices do not equal expected future spot prices. Essentially, these are theoretical relationships because expected prices are not observable.
A
B
D