Curriculum, V.6, p.126 (Q14)
The difference Malquist finds between the futures price and the expected spot price for GBP in 244 days is most likely due to: A)contango B)backwardation C)normal backwardation
Item set She finds that the 244-day arbitrage-free futures price (GBP/EUR) is below the 244-day expected spot exchange rate (EUR is lower, GBP is higher)
I think the answer should be A)contango?
C.
Contango and backwardation compare the spot price to the forward/futures price. Normal contango and normal backwardation compare the expected (future) spot price to the forward/futures price.
Got it.
But i think the answer should be " Normal contange", because item set says futures price ( GBP /EUR) is below the 244-day expected spot exchange rate. Means GBP is higer than expected?
Review the definitions of normal contango and normal backwardation; you’re mistaken.
The futures price is below the expected spot, so it’s normal backwardation.
B for below B for backwardation, that’s my expert way of remembering it.