Contango
- Futures price > spot price
- Upward FC slope
- Speculators are “willing to pay more for a commodity [to be received] at some point in the future than to purchase the commodity immediately. This may be due to people’s desire to pay a premium to have the commodity in the future rather than paying the costs of storage and carry costs of buying the commodity today.”
Backwardation
- Futures price < spot price
- Downward FC slope
Cost of Carry
- Cost of holding inventory
- Warehousing fees, interest forgone
“Spot prices are generally used to settle forward contracts. This follows directly from the original purpose of forwards as hedges against uncertain future spot prices.” “The price of the nearest forward contract converges with spot price. This is generally true, but not a remarkable phenomenon because over short periods the spot and near-forward markets are readily arbitraged via storage and other means of temporal exchange.”