Contango

The price of an asset for forward delivery is usually above the price you would pay today. For example, if I sell you a ton of copper now, you’ll then have the hassle of storing and insuring it. If you want me to store and insure it for, say, three months before delivering it, I will charge you those ‘costs of carry’ on top of the ‘cash price’. I will also add a bit for the fact that my money could be earning interest instead of being tied up in one ton of copper. When the price of an asset for future/forward delivery is above the cash price, the market is said to be in ‘contango’. The reverse situation is unusual (perhaps a short-term supply scare is driving up the cash price) and is known as ‘backwardation’.

• Watch Tim Bennett’s video tutorial: What are ‘contango’ and ‘backwardation’?

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