Backwardation (redirected from Backwardization)
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condition in which futures prices
are lower in the distant delivery
months than in the nearest delivery month. This may occur when the costs
of storing the product until eventual delivery are effectively subtracted from the price today. The opposite of contango
In Keynesian economics
, a theory stating that the future spot price
for a commodity
will be higher than the forward price
. This is because the producers of commodities expect to sell
no matter what and are willing to sell at a loss
, if necessary. In normal backwardation, no rational investor
will buy on the future spot market if he/she can buy more cheaply on the forward market. The extent to which normal backwardation occurs in the market
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Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
If the price of a futures contract that expires in the near term is higher than the price of a contract with the same terms that expires at a later date, the relationship between the two is called backwardation.
More typically, the contract with the longer-term expiration commands a higher price. That relationship is called contango.