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Contango

The price of an asset for forward delivery is usually above the price you would pay today...

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'.

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Watch Tim Bennett's video tutorial: What are 'contango' and 'backwardation'?

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