- Overview of Derivatives with R Tutorial
- How to Create Futures Continuous Series
- Exploring Crude Oil (CL) Future Data from Quandl in R
- R Visualization of Statistical Properties of Future Prices
- Comparing Futures vs Spot Prices for WTI Crude Oil
- Different Parties in the Futures Market
- Creating Term Structure of Futures Contracts Using R
- Contango and Backwardation
- Exploring Open Interest for Futures Contracts with R
- Review of Options Contracts
- Black Scholes Options Pricing Model in R
- Binomial Option Pricing Model in R
- Understanding Options Greeks
- Options Strategy: Create Bull Call Spread with R Language
- Options Strategy: Create Long Straddle with R Language

# Contango and Backwardation

The concepts of **Contango** and **Backwardation** are related with the term structure of the futures contracts. During the life of a contract, the difference between the futures price and the expected future price is called **basis**. At the end of the contract’s life, the futures price converges to the expected future spot price. Each month, the future price is updated with respect to the expectations and the **basis** is erased.

If the contract futures price is above the future expected spot price, the scenario is called **Contango**, and if the contract futures price is below the future expected spot price the scenario is called **Backwardation**.

In **Contango,** the futures price decline over time to be adjusted to the expected future spot price as both must converge at expiration. In contrast, in **Backwardation,** futures prices tend to be below expected futures spot prices, so the futures prices go up to converge with the expected futures spot prices.

**Backwardation** is beneficial for traders who have a long position on the stock, as the contract future price would increase over time.For commodity assets, **Backwardation** is produced when there is a shortage in the commodity supply. In this situation, traders can benefit by performing a short sale of the asset at the spot price, and go long on futures contracts waiting for an increase in the future price.

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