Can someone please help me understand Normal contango? i understand that normal contango means that futures price is higher than expected spot price in the future. What I don’t get is will the futures price rise or fall over the life of the contract? Thx
Don’t futures prices converge with the spot price at expiration, whereas forwards don’t necessarily?
Not sure if you are talking about roll yields…but futures prices will converge to the spot rate over time. If you are talking about roll yields (rolling mature contracts forward), if you are long the position and it is in contango, the roll yield will be negative as the futures price converges to the spot rate. If it is backwardation, the roll yield will be positive as the price converges upward to the spot rate.
I have been confused regarding normal contango / normal backwardation, and I found a very helpful video on youtube with charts. I would highly recommend it if this subject is not intuitive, especially if you are a visual person. just search ‘normal contango’ on youtube, it’s from bionic turtle (thank you mr. bionic turtle, whoever you are) It’s about 8 minutes, and the “normal” part starts at 3:30, the first section is a review of contango and backwardation (not the “normal” flavor).
http://www.youtube.com/watch?v=8JQthSNjskE Making it easy for others
Nice video, helped a lot. Thanks guys!!!
Thanks again Mr. Bionic Turtle.