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backwardation chart

jack11961

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Thread starter #1
I am constantly frustrated if the axis are identical why do the charts say different things?


This chart tells me in backwardation futures price increases towards maturity



This chart tells me in backwardation futures price decreases towards maturity

backwardation.png
 
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David Harper CFA FRM

David Harper CFA FRM (test)
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#2
Hi @jack11961 But they are both saying (correctly) the same thing:
  • As time marches forward (moving forward in time), under normal backwardation (assuming constant or at least non-decreasing spot) the futures price is increasing; or equivalently
  • By definition of normal backwardation the futures price is an decreasing function of maturity; i.e., S(0) > F(+1 month) > F(+2 months)
In your first chart, movement forward in time is left-to-right, but in your second chart movement forward in time is right-to-left. The advantage of the second chart is that it displays the forward curve as it might appear from the perspective of today; backwardation = decreasing forward curve. Some more theory here https://www.bionicturtle.com/forum/threads/contango-backwardation-and-trading-cheap.10654/ (including we have tags e.g., https://www.bionicturtle.com/forum/tags/contango/). I hope that's helpful!
 
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