Contango

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Contango

A market condition in which futures prices are higher in the distant delivery months.

Contango

A situation in which the futures price for an asset is higher than the expected future spot price. The futures price in contango declines to the future spot price as the futures contract approaches maturity. See also: Backwardation, Keynesian economics.

contango

In futures or options trading, a market in which longer-term contracts carry a higher price than near-term contracts. The premium accorded to longer maturities is a normal condition of the market and reflects the cost of carrying the commodity for future delivery. Compare inverted market.

Contango.

The price of a futures contract tends to reflect the cost of storage, insurance, financing, and other expenses incurred by the producer as the commodity awaits delivery.

So, typically, the further in the future the maturity date, the higher the price of the contract. That relationship is described as contango.

If the opposite is true, and the price of a longer-term contract is lower than the price of one with a closer expiration date, the relationship is described as backwardation.

contango

  1. an additional payment made by an investor or speculator who has purchased or sold a SHARE, STOCK etc. on the UK STOCK MARKET in return for being permitted to carry over the settlement of the share transaction from one ACCOUNT PERIOD to the next.
  2. a condition in a FORWARD MARKET where the most distant delivery months trade at a premium to the near term delivery months.
References in periodicals archive ?
Antonio Ruiz, a broker in the Bronx, failed to forward premiums to the appropriate insurer.
The department, in a news release last month, said it had received numerous complaints about Brand's failure to forward premiums, a direct violation of state law.
If each of the individual covariances that determine the forward premiums are zero, then the pure expectations hypothesis holds.
The second decomposition expressed the bond price in terms of the expected product of the prices of future short-term bonds and the product of individual forward premiums at each maturity.
Very loosely speaking, this expression relates the holding-period premium to the conditional covariance between expected future short prices and expected future forward premiums. Analogously, using the Fisher equation, we have from (30)
She argues that the model "accounts for many features of the nominal term structure of interest rates." Most importantly, from our perspective, the model-based forward premiums that Wachter computes help to account for the empirical disparity between long-term rates and the corresponding average of expected future short-term rates--that is, the violation of the pure expectations hypothesis.
In addition, many of the early forward delivery bonds involved a fairly high forward premium. The forward premium on a forward delivery bond is composed of two components, a liquidity premium and a forward rate premium.
The authority also wanted a bond that would have a reasonably small forward premium. In 1990, Wall Street was told that there were two bond issues in particular that the Port Authority wanted to refund on a streamlined forward delivery basis: the $100 million, 10 1/8 percent consolidated bonds, 50th series, first callable in December 1992, and the $100 million, 11 percent consolidated bonds, 51st series, first callable in June 1994.
The difference between the two is called the forward premium, and it is shaped by such factors as the level of long-term and short-term rates and the shape of the yield curve.
This translates into high forward premium for the low interest advanced economy currency, which increases with the duration of the forward contract via the covered interest parity condition.
As a result, when a contract is renewed/rolled over during a volatility cluster, the risk due to higher volatility is often reflected in higher forward premium, which makes hedging unattractive.
Following the evidence of the presence of volatility clusters, we need to look at forward premium movement during such periods.