Backwardation

Dictionary Says

Definition of 'Backwardation'

A theory developed in respect to the price of a futures contract and the contract's time to expire. Backwardation says that as the contract approaches expiration, the futures contract will trade at a higher price compared to when the contract was further away from expiration. This is said to occur due to the convenience yield being higher than the prevailing risk free rate.
Investopedia Says

Investopedia explains 'Backwardation'

When backwardation does occur in a futures market it has been suggested that an individual in the short position would benefit the most by delivering as late as possible.

Backwardation in futures contracts was called "normal backwardation" by economist John Maynard Keynes. This is because he believed that a price movement like the one suggested by backwardation was not random but consistent with the prevailing market conditions.

Backwardation is the opposite of contango.

Sign Up For Term of the Day!

Try Our Stock Simulator!

Test your trading skills!

Related Definitions

  1. Contango

    A situation ...
  2. Futures

    A financial ...
  3. Inverted Market

    A condition that ...
  4. Futures Market

    An auction ...
  5. Commodity

    1. A basic good ...
  6. Keynesian Economics

    An economic ...
  7. Futures Strip

    The sale or ...
  8. Roll Yield

    The amount of ...
  9. Forwardation

    A term used in ...
  10. Cash Market

    The marketplace ...

Articles Of Interest

  1. Contango Vs. Normal Backwardation

    Learn about the futures curve and what its shape means for hedgers and speculators.
  2. Futures Fundamentals

    For those who are new to futures but want a solid understanding of them, this tutorial explains what futures contracts are, how they work and why investors use them.
  3. Forex: Wading Into The Currency Market

    We go over the ground rules and available resources needed for this undertaking.
  4. Commodities: The Portfolio Hedge

    These diverse asset classes can provide downside protection and upside potential. Find out how to use them.
  5. Derivatives 101

    Learn how to use this type of investment as an alternative way to participate in the market.
  6. Risk Tolerance Only Tells Half The Story

    Just because you're willing to accept a risk, doesn't mean you always should.
  7. Investors: Rely On Your Gut

    Find out how your personality and natural instincts can direct your investment choices.
  8. Simplify Your Portfolio

    Faced with an overabundance of choices, many investors forget to stick to the basics.
  9. Hedging With ETFs: A Cost-Effective Alternative

    The benefits of ETFs for hedging are clear and investors of all sizes are taking notice.
  10. Minis Provide Low-Cost Entry To Futures Market

    These contracts provide access to commodities without a huge capital commitment.

comments powered by Disqus
Recommended
Loading, please wait...
Trading Center