So I run into this question: When an investor holds the underlying asset of a futures contract and concern about the backwardation in the future market, she will most likely?
A: Sell forward
B: Buy forward
C. Sell the asset
The answer is A. Which I do not understand.
Since there is backwardation in the future market, it means that the future price is lower than the spot price, and might increase to converge with spot price when closer to maturity. By buying the forward contract at Ft today, the investor could lock a purchase price that is lower than the future spot price St, and at maturity, the gain would be St-Ft which is positive. If we do what option A says, sell a forward, we will have to sell the underlying at maturity at Ft, which is lower than the future spot price St, and we will have a loss. Can someone explain the logic behind the answer?