This technical term is used in connection with futures contracts on the financial market and the commodities market. In this article, we will show you what backwardation means and how it differs from Contango differentiates.
Backwardation declaration
With a Forward contract or Futures contact two partners enter into an agreement on the delivery of goods on a fixed date. To this end, they agree the Amount of the payment. Delivery and payment are due on the due date.
The term backwardation is used when the Future price below the current spot price or spot price of an underlying asset, for example a Raw material. This is therefore a reduction in the price.
Normally, backwardation occurs when market participants expect a future scarcity of the commodity. One reason may be rising demand for the underlying asset or low availability of the commodity.
Also political changes or natural disasters can have an impact and trigger backwardation. In such cases, investors are more willing to pay a higher spot price.
If the corresponding raw materials are purchased in good time Investors benefit from high spot prices and sell the commodities. However, there is a risk that the market will turn and behave differently than expected. This can lead to a Contango situation come.
Contango vs. backwardation
A contango situation is practically the opposite of a backwardation. The price of the futures contract is higher than the current spot price, i.e. it is a contango situation. Surcharge.
This surcharge is due to various costs, such as the costs of the Storage, Administration or for Insurances. These costs are taken into account in pricing.
Investors can benefit from contango. If you have a Short position the difference between the spot price and the futures price. Win. Go against it Longyou can use this difference lose. Contango does not play a role for day traders due to the short time periods involved.
Conclusion: Backwardation German
The term backwardation comprises a higher spot price than the later futures price. Such cases occur when the raw material is expected to be in short supply, demand increases sharply or environmental disasters and political changes occur.
The Opposite of backwardation is a Contango Situation. Here is the Futures price higher than the current spot priceas costs incurred during pricing are taken into account. These include storage, administration and insurance costs.