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YouTube T3-20: Contango versus normal backwardation

Nicole Seaman

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In the case of a consumption commodity (e.g., corn, copper) we expected to observe contango: F(0) exceeds S(0). Contango implies (i) the cost of carry exceeds the convenience yield, and identically (ii) the risk-free rate exceeds the lease rate. We also might expect normal backwardation: F(0) is less than E[S(t)]. Finally, in a contago the roll return is negative for the long position.

 
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