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. Hedge

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

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

    A contractual agreement, generally made on the trading floor ...
  4. Futures

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

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

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

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center