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

    A financial contract obligating the buyer to purchase an asset ...
  2. Option

    A financial derivative that represents a contract sold by one ...
  3. Futures Strip

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

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

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

    Making an investment to reduce the risk of adverse price movements ...
Related Articles
  1. Options & Futures

    An Overview Of Commodities Trading

  2. Options & Futures

    Investing In Fine Wine

  3. Economics

    What Is Wrong With Gold?

  4. Investing Basics

    How To Invest In Commodities

Hot Definitions
  1. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  4. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  6. 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 ...
Trading Center