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The simple answer: When the the futures contract price is higher than the expected spot price when the contract becomes due, or during the lifetime of the contract. When the contract becomes due, the price should be exactly or very close to the spot price (the price of the commodity right now) on the day that it is due. But more often than not, this is not the case. So there would be a decline in prices as the contract approaching the last trading day (or even last minutes of trading that day) as the 'future price' is then matched to meet the spot price.
Non-perishable commodities such as oil or gold are typically contango, as it would cost money to insure, store, etc the underlying commodity. This would make the 'future' price of a contract 12 months from now greater than the spot price to buy the same barrel of oil today. Remember, one of the objectives of futures contracts is for suppliers to lock in a price to guarantee that they will have xx barrels of oil, gold, etc in the future at $yy.yy sales price today.
Contango is just an adjective that describes the actual phenomena of the futures price falling to line up with the spot price as the contract approaches maturity.
The opposite of contango is backwardation.
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Are futures contracts long term contracts?
They can be. If you look at the futures pricing, you'll see futures contracts that settle in 2013--and futures contracts that settle next month.
What is differences between currency future and currency future contracts?
"Futures" and "Futures contracts" are the same thing.
Are options contracts referred to as future contracts?
No. Options let you decide whether to go through with the transaction; futures require that you do.
What is a futures executioner?
A futures Executioner is a person that completes contracts between a buyer and a seller for the price and delivery of the stock or goods at a future date.
What is open interest in futures market?
Open Interest is the total number of outstanding contracts that are held by market participants at the end of the day. It can also be defined as the total number of futures contracts or option contracts that have not yet been exercised (squared off), expired, or fulfilled by delivery.
What is a contango position?
A commodity market is in contango if the spot price is lower than the futures price. A contango position is the futures position you hold with a price higher than spot price.
Are futures contracts long term contracts?
They can be. If you look at the futures pricing, you'll see futures contracts that settle in 2013--and futures contracts that settle next month.
What is contango in commodity markets?
In short, whether we have Backwardation or Contango depends on how the expected future spot prices are quantified and how the related commodity strips behave. Contango and Backwardation in Common Usage Investment professionals on financial TV channels and in newspapers colloquially refer to upward trends in futures prices as contango and downward trends in futures prices as backwardation. Contango and Backwardation in Economic TheoryIn economic theory regarding Backwardation and Contango, associated with John Maynard Keyns and John Hicks, for Contango to exist, expected spot prices (someday in the future) have to be lower than current futures prices for the same future moments, and reverse has to apply for Backwardation. Thus whether we have a contango or bacwardation depends on an arbitrary forward estimate of spot prices. For example, if we estimate that today's spot price, price at which a physical commodity is trading today, is an expected spot price someday in the future, and we see an upward trend in a commodity strip (series of future contracts prices), we see a contango. On the other hand, if the futures prices in a commodity strip trending upwards are considered unbiased estimates of the expected future spot prices, meaning they are equal, there is no Contango or Backwardation to speak of. By the way, upward trend of estimates may be a result of storage expenses.
What is backwardation in commodity markets?
In short, whether we have Backwardation or Contango depends on how the expected future spot prices are quantified and how the related commodity strips behave. Contango and Backwardation in Common Usage Investment professionals on financial TV channels and in newspapers colloquially refer to upward trends in futures prices as contango and downward trends in futures prices as backwardation. Contango and Backwardation in Economic TheoryIn economic theory regarding Backwardation and Contango, associated with John Maynard Keyns and John Hicks, for Contango to exist, expected spot prices (someday in the future) have to be lower than current futures prices for the same future moments, and reverse has to apply for Backwardation. Thus whether we have a contango or bacwardation depends on an arbitrary forward estimate of spot prices. For example, if we estimate that today's spot price, price at which a physical commodity is trading today, is an expected spot price someday in the future, and we see an upward trend in a commodity strip (series of future contracts prices), we see a contango. On the other hand, if the futures prices in a commodity strip trending upwards are considered unbiased estimates of the expected future spot prices, meaning they are equal, there is no Contango or Backwardation to speak of. By the way, upward trend of estimates may be a result of storage expenses.
Is the meaning of backwardation and contango used in finance textbooks the same as the colloquial meaning used by Wall Street?
In short, whether we have Backwardation or Contango depends on how the expected forward spot prices are quantified and how the related commodity strips behave. Contango and Backwardation in Common Usage Investment professionals on financial TV channels and in newspapers colloquially refer to upward trends in futures prices as contango and downwards trends in futures prices as backwardation. Contango and Backwardation in Economic TheoryIn economic theory regarding Backwardation and Contango, associated with John Maynard Keyns and John Hicks, for Contango to exist, expected spot prices (someday in the future) have to be lower than current futures prices for the same future moments, and reverse has to apply for Backwardation. Thus whether we have a contango or bacwardation depends on an arbitrary forward estimate of spot prices. For example, if we estimate that today's spot price, price at which a physical commodity is trading today, is an expected spot price someday in the future, and we see an upward trend in a commodity strip (series of future contracts prices), we see a contango. On the other hand, if the futures prices in a commodity strip trending upwards are considered unbiased estimates of the expected future spot prices, meaning they are equal, there is no Contango or Backwardation to speak of. By the way, upward trend of estimates may be a result of storage expenses.
What is differences between currency future and currency future contracts?
"Futures" and "Futures contracts" are the same thing.
Are Dow Jones Futures future contracts?
Yes. Dow Jones Futures are future contracts. This is because future contracts practically do not have an expiration date. It is also good because of the fact you can buy and sell single or bulk stock futures.
What Commodity futures contracts can be bought and sold on the open market for reasons?
Futures contracts remain valid even if the original parties to the contract sell the rights.
Where to find some individual stock futures?
Single-stock futures In finance, a single-stock futures is a type of futures contracts between two parties to exchange a specified number of stocks in company for a price agreed today (the futures price or the strike price) with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange
What is futures trading?
Futures trading is the buying and selling of contracts which require you to buy or sell an item on a certain date for a certain price. Most (very close to all) futures contracts are written against commodities rather than stock.
What is an example of a derivative product?
Derivative instruments are classified as: Forward Contracts Futures Contracts Options Swaps
Which stock is better gold or silver for trading?
If you are a hedger or a speculator, gold and silver futures contracts offer a world trade at centralized exchanges, trading futures contracts offers more financial.
