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Backwardation

• A market condition in which futures prices are lower in the distant delivery months than in the nearest delivery month. This situation may occur in when the costs of storing the product until eventual delivery are effectively subtracted from the price today. The opposite of co tango.

• Is the market condition whereby the deferred or more forward delivery months are at a progressive discount to the spot or nearby month. This is also known as an inverted market. This is opposite to a contango or carrying charge market.

 
 Embedded terms in definition
 Carrying charge market
Carrying charge
Contango
Delivery month
Delivery
Discount
Forward delivery
Forward
Futures price
Futures
Inverted market
Market
Nearby
Prices
 
 Referenced Terms
 Convenience yield: The extra advantage that firms derive from holding the commodity rather than the future.Is the assumed or expected benefit of holding a long position in a physical commodity. Othen this holding is to satisfy existing near-term delivery commitments or to maintain uninterrupted manufacturing processes. It highlights the marginal value of an inventory relative to the anticipated usage. High convenience yields tend to occur in inverted or Backwardation markets. In these situations, the costs of being without the physical commodity are greater than the premium paid to hold the commodity. A positive convenience yield is greater than the sum of the financing plus other storage carrying costs.

 Inverted market: A futures market in which the nearer months are selling at price premiums to the more distant months. Related: premium.Is the market condition whereby the deferred or more forward delivery months are at a progressive discount to the spot or nearby month. This condition is marked by premiums for immediate or nearby deliveries. This is also known as a Backwardation market. This is opposite to a contango or carrying charge market.

 
 Related Terms
 Normal backwardation theory

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