Derivatives & Risk

What is contango in futures markets?

Contango is a market condition in which futures prices trade above the expected future spot price, so longer-dated contracts cost more than nearer ones. It often reflects the costs of holding the underlying asset over time, such as financing. For example, if spot sits at 100 and successive monthly futures trade at 102, 104, and 106, the market is in contango. An investor rolling expiring contracts forward in contango pays more to maintain exposure, which can erode returns over time. The opposite condition is called backwardation.

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