# Futures Question

Normal backwardation occurs when: a. There are more hedgers using long hedges than short hedges. b. There are more hedgers using short hedges than long hedges. c. When the number of hedgers using long and short hedges is approximately equal. d. When the price of a futures contract is higher than the price of the asset that underlies it.

A? Explanation - Normal backwardation occurs when the future price is less than the spot price, this can happen when the demand for long hedges is more than the demand for short hedges, so A. Am not 100% sure about the explanation. Suggestions and comments are welcomed.

I agree with gauravku normal backwardation occurs when FP < expected spot price backwardation occurs when FP < spot price Future contract, transfer of risk from asset holder to buyer of contract, therefore FP should be lower due to the transfer of risk compared to expected spot price. More long = hedgers = more long positions = more transfer of risk from asset holder to contract holder, (this pushes FP downward) D) is deffinately wrong, the futures price should be lower C) nope B) nope A) Most likely Anyone else?

I think B, agreed with “Normal backwardation occurs when the future price is less than the spot price” but then makes you think if future price is less than spot it means more short sellers…hence more hedgers using short than long…not sure if its correct though…just a hunch… what’s the answere?

N Van is absolutely correct. And his explanation is spot on too. good job guys!

Wow. The other two posters were so confident that I was trying to see how B was wrong in my own mind. Got to be more self-assured.

A

damn i thought it’s A too because the spot is higher that means more people have bought at spot price to drive up the price… therefore more people have long’ed the future…

thepinkman Wrote: ------------------------------------------------------- > Wow. The other two posters were so confident that > I was trying to see how B was wrong in my own > mind. Got to be more self-assured. P(2nd answer = 1st answer in a thread | 1st answer is wrong) = 0.8 P(someone posts answer to question in a thread | OP has already posted correct answer) = 0.98

At night, I am often the first to post an answer and can confirm chrismaths probabilities from the first equation.