Contango & Normal Backwardation

swarnendupathak
Finance Junkie
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Contango & Normal Backwardation

Postby swarnendupathak » Mon Sep 17, 2012 11:37 am

Hi,
Can any one explain the specific concept of Contango & Backwardation & please refer its significance & impact in making market decision.

Regards
Swarnendu

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naresh.thkr
Good Student
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Joined: Sat Aug 11, 2012 7:02 pm

Re: Contango & Normal Backwardation

Postby naresh.thkr » Wed Sep 19, 2012 5:45 pm

Hi,

When Future price is > spot price that is called as Contango and future price < spot price is called as backwardation. Based on this we can find the arbitrage opportunities in stock. Recently Contango situation was occurred in Hero motors where spot was much less than usual future price so trader sold in spot and go long in futures. Difference was close to Rs. 40.00.

content.pristine
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Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Contango & Normal Backwardation

Postby content.pristine » Thu Sep 20, 2012 10:36 am

Thanks Naresh for your answer..

I'd like to add that Backwardation happens when there is a convenience yield or dividend associated with the underlying asset. Markets in Backwardation have positive roll yield.

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: Contango & Normal Backwardation

Postby swarnendupathak » Thu Sep 20, 2012 3:43 pm

Thanks for all urs valuable replies.
Suppose the situation is in contango i.e. E(spot price) is less than the forward price. But if in contango situation if the E(sp) increases than the future price, then can we call the situation as normal backwardation??? & vice versa???
Is there are any difference between contango & normal contango & between backwardation & normal backwardation????
Waiting eagerly for all ur valuable replies.

Regards
Swarnendu

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Contango & Normal Backwardation

Postby content.pristine » Thu Sep 20, 2012 4:54 pm

Hi Swarnendu,

Please do not confuse the concepts of Contango/Backwardation and Normal Contango/Normal Backwardation.
Contango/Backwardation gives the relationship between Spot and Futures.
Normal Contango/Normal Backwardation gives the relationship between Expected Spot and Futures.
This is a very common mistake. Don't relate the two.

8-)


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