Saturday, July 21, 2007
The English come up with all sorts of funny terms, and of course we have to learn them, for we have adopted most of their financial machinations (e.g., stock market).
Contango and backwardation theory deal with spot and futures prices of commodities. For example, contango refers to the spot price of a commodity (say oil) being less than the futures's price; backwardation is the opposite: the spot price is greater than the futures's price.
The reasons for the spot price being higher or lower than the futures vary: different aspects come into play such as carrying cost and convenience yield (fancy words to talk about inventory cost and a bit of profit premium for you having the actual commodity).
These are not your everyday concepts, but are useful nonetheless--arguably, only useful to finance geeks or investment managers.
For a more or less in-depth definition, visit Econbrowser