Forwardation

AAA

DEFINITION of 'Forwardation'

  1. A term used in pricing futures contracts. Forwardation is a standard scenario in futures trading whereby a future price of the underlying commodity would be more than the expected spot (or immediate delivery) price. The increase in price can be justified or predicted based on additional costs for hard or soft commodities such as delivery, insurance, storage, etc.
  2. Forwardation can be more difficult to justify and/or calculate with financial instrument futures.
  3. Also referred to as "contango."
  4. Opposite of backwardation.

INVESTOPEDIA EXPLAINS 'Forwardation'

Over time the market will continually receive new information which it will use to adjust the future and expected future spot price - the most rational future price - of a futures contract. More information will typically have the effect of depressing, or lowering, the futures price. A market in forwardation takes these variables into account to determine the futures price; however, the actual spot price will often deviate from the expected price.

RELATED TERMS
  1. Futures Strip

    The sale or purchase of futures in sequential delivery months ...
  2. Backwardation

    A theory developed in respect to the price of a futures contract ...
  3. Commodity

    1. A basic good used in commerce that is interchangeable with ...
  4. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  5. Futures Market

    An auction market in which participants buy and sell commodity/future ...
  6. Futures Contract

    A contractual agreement, generally made on the trading floor ...
Related Articles
  1. An Overview Of Commodities Trading
    Options & Futures

    An Overview Of Commodities Trading

  2. Investing In Fine Wine
    Options & Futures

    Investing In Fine Wine

  3. What Is Wrong With Gold?
    Economics

    What Is Wrong With Gold?

  4. How To Invest In Commodities
    Investing Basics

    How To Invest In Commodities

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center